India

Tax Insights
Issue 18

June 2020

In this issue
COVID-19 and beyond:
The road to recovery

Key tax amendments

and the way forward
 Foreword
The COVID-19 pandemic has dealt a severe blow to
an already stressed global economy. The severity of
the pandemic across the globe has pushed countries
and organizations into unchartered territories. The
macro-economic impact of COVID-19 could result in
a significant dip in GDP growth, an adverse impact
on fiscal deficit and a substantial erosion of investor
wealth. While the path to recovery is unpredictable, a
prolonged “see-saw” shaped recovery looks most likely
for India, leading to a “new normal”.
To cope with the crisis, the government has already
announced a stimulus package amounting to INR 20.97
lakh crore, that is 9.8% of FY21 estimated GDP. Of
this package, only 9.7% is the additional burden on the
center’s FY21 budget. An analysis carried out by EY’s
Tax and Economic Policy Group shows that, the center’s
fiscal deficit in FY21 may be estimated at 7.1% if this
additionality in the recently announced stimulus is to be
provided for and the budgeted level of expenditures is
to be protected.
Besides economic and trade analysis, the magazine
explores if the COVID experience will further foster
online collaboration platforms to create the framework
for a ‘Gig Economy’ as the new talent marketplace. The
write-up on investment planning post COVID discusses
the likely geographical rejig of manufacturing hubs and
the possibility of India emerging as a globally preferred
investment destination depending on its ability to align to
international standards of industrial support.
This edition also includes articles on a number of
contemporary tax topics such as India’s new regime for
dividend taxation, tax dispute settlement scheme, impact
of COVID-19 on international tax, transfer pricing, GST
and cross-border mobility.
We hope you will find this publication interesting
and insightful. We look forward to your
feedback and suggestions.

In this edition of India Tax Insights, we present our

analysis of the pandemic’s impact on Indian economy
and finding our way through the new normal. The
article on world trade post COVID discusses the
potential new environment where countries may
start to protect their vital supplies and increase tariff
and non-tariff barriers while defending their existing Sudhir Kapadia
domestic industries through trade remedial measures. National Tax Leader, EY India

COVID-19 and beyond
Road to recovery: key tax and policy changes
Coping with COVID-19
5 induced economic collapse
Dr. D.K. Srivastava
Trade policy scenario in post-
9 COVID-19 era
Agneshwar Sen
COVID-19 impact on mobile
11 workforce and PE implications
Amarpal S. Chadha
Countering Covid: a GST
13 perspective
Uday Pimprikar
Has COVID-19 made India a
17 more favorable investment
destination?
Bhavesh Thakkar
In this issue
Key tax amendments
and the way forward
Will COVID-19 accelerate
Dividend’s tryst
20 adoption of the talent
marketplace model
with taxation
35
Jayesh Sanghvi
Ajit Krishnan
Tax breaks for Covid-19 spend - Tax exemption for
26 ripe for amendment? sovereign funds to boost
Infra investments in India 38
Bharat Varadachari
Gaurav Karnik
Indian conglomerates should Direct Tax Vivad se Vishwas:
28 employ strategies to retain and
protect existing resources
settling the unsettled 40
Rajan Vora
Raju Kumar
The anti-corona prescription for Variable capital companies:
31 transfer pricing a new opportunity for asset
managers and lessons for India 45
Ashwin Vishwanathan
Sameer Gupta and Tejas Desai
Are ESOPs still lucrative
for start-ups? 48
Shalini Jain
Global news Econometer
3
 COVID-19 and
COVID-19 and beyond
beyond

Road to recovery: key tax

and policy changes
Has COVID-19
COVID-19
Coping with Trade policy made India a
impact on mobile Countering Covid:
COVID-19 induced scenario in post- more favorable
workforce and PE a GST perspective
economic collapse COVID-19 era investment
implications
destination?

Will COVID-19 Indian

accelerate Tax breaks conglomerates
The anti-corona
adoption of for Covid-19 should employ
prescription for
the talent spend - ripe for strategies to
transfer pricing
marketplace amendment? retain and protect
model existing resources

4

Dr. D.K. Srivastava
Chief Policy Advisor, EY India
Coping with
COVID-19 induced
economic collapse
Unprecedented global crises since the
1929 Great Depression
Multilateral institutions have assessed that the COVID-19
pandemic will leave the world economically worse than the
2008-09 global economic and financial crisis. Its impact may
be more comparable with the Great Depression of 1929. The
International Monetary Fund1 (IMF) and the United Nations2
(UN) have projected the global GDP to contract by (-) 3% and (-)
3.2%, respectively in 2020. As per the UN, two major emerging
and developing economies, namely, India and China, are
expected to show a low but positive growth at 1.2% and 1.7%,
respectively in 2020. Other leading international institutions
and rating agencies project this year’s global growth to range
from (-) 5.9%3 (Deutsche Bank) to (-)1.1%4 (JP Morgan).
1 IMF World Economic Outlook, April 2020
2 UN World Economic Situation and Prospects as of mid-2020 (13 May 2020)
3 https://www.reuters.com/article/global-policy/column-markets-return-to-doldrums-set-to-
summon-more-fiscal-firepower-mike-dolan-idUSL8N2BR5YX
4 https://www.bloomberg.com/news/articles/2020-03-19/wall-street-agrees-the-world-is-in-
recession-disagrees-on-depth
5
The COVID-19 induced economic crisis is quite different from
the 2008-09 global economic and financial crisis in some
crucial respects. The roots of the 2008-09 crisis emanated
from the housing market crisis of the US and excessive lending
by global financial institutions to households based on poor
quality collaterals. The credit markets across the world crashed,
leading to a collapse of credit demand across the countries.
This was a demand-led crisis that was addressed by individual
and coordinated stimulus across the G-20 countries.
These countries coordinated their
stimulus action by reducing interest
rates and increasing their debt-financed
government expenditures. In some
of the economies where stimulus
measures were overdone, there was
a sharp rise in inflation. The longer-
term outcome was an increase in the
indebtedness at the global level.
Since the COVID-19 crisis may be deeper than the 2008-09
crisis, the reliance on fiscal measures would be even larger.
In fact, in most developed countries, the interest rates are
near zero and any monetary side stimulus may have limited
effect. As such, the borrowing-based financing of government
expenditure should serve to boost the demand in different
countries. However, the current crisis is a combination of
supply side disruptions and a sinking of demand. As demand is
uplifted through stimulus, supply side disruptions may have to
be simultaneously removed so that the two sides may come out
of the crisis in sync. This calls for a carefully calibrated injection
of demand stimulus which should be synchronized with the
stages of the exit from the lockdown.
India: slipping into a fall while
already on a slide
India’s current growth prospects are highly constrained as it
has entered the COVID-19 crisis on the back of an economic
downslide. The real GDP growth was estimated at 5% for
FY20 as per the earlier Central Statistical Organisation’s
release dated 28 February 2020. As more recent information
for 4QFY20 becomes available, this estimate may go down
significantly. The UN has projected India’s FY20 growth at
4.1%. Available forecasts for India’s FY21 growth vary from
(-) 5.2% (Nomura) to 4.0% (ADB), showing a wide range of 9.2%
points. This indicates significant uncertainty in the assessment
of the economic impact of COVID-19 on the Indian economy.
High frequency indicators highlight significant adverse impact
of the COVID-19 pandemic5. Purchasing Manager’s Index (PMI)
manufacturing and services contracted to unprecedented
levels of 27.4 and 5.4, respectively in April 2020. Reflective
of the weakness in demand conditions, growth in bank
credit remained subdued at 6.7% in the fortnight ending 24
April 2020. In March 2020, Index of Industrial Production
contracted by (-)16.7%, its lowest level in the 2011-12
base series. Contraction in power consumption increased
considerably to (-) 24.7% in April 2020, reflecting a sharp fall
in domestic demand. At (-) 60.3% in April 2020, contraction
in exports was the sharpest since 1991, reflecting global and
domestic supply disruptions. With respect to automobile sales,
information from major players in the sector indicates zero
domestic sales in April 20206. Gross tax revenues of the center
contracted by (-) 0.8% during April-February FY20 with direct
taxes contracting by (-) 3.5% and indirect taxes witnessing a
subdued growth of 1.6%.
5 EY Economy Watch, May 2020 edition
6 https://www.news18.com/news/auto/april-2020-to-go-down-
in-india-history-as-the-month-of-zero-car-and-two-wheeler-
sales-2600945.html
6
 Fighting our way out: policy stimuli and preparing for the new normal
a. Policy stimuli
On the monetary side, the repo rate was reduced to an
unprecedented level of 4.0% on 22 May 2020 with a
cumulated reduction of 115 basis points since 27 March
2020. Other relevant rates such as reverse repo rate,
bank rate and marginal standing facility (MSF) rate have
also been reduced. Numerous liquidity-augmenting and
regulatory measures have also been undertaken since
the end March 2020. Liquidity augmenting initiatives
include a reduction in the Cash Reserve Ratio, targeted
long-term repos operations (TLTROs), special refinance
window for all India financial institutions, and eased
overdraft rules for state governments.
The RBI also increased the limit under ways and means
advances (WMAs) for the central and state governments.
In TLTRO 2.0, as announced on 17 April 2020, an
aggregate amount of INR50,000 crores was particularly
aimed at supporting NBFCs. On 27 April 2020, the RBI
announced an injection of INR50,000 crore through a
special liquidity facility for mutual funds. The regulatory
initiatives of the RBI include permitting commercial
banks and financial institutions to provide moratorium
of three months on payment of instalments in respect
of all term loans outstanding as on 1 March 2020 and
deferment of interest on working capital facilities for
three months on all such facilities. These have been
extended for another three months till 31 August 2020.
According to government estimates provided on 17
May 2020, the monetary stimulus through liquidity
enhancement measures amounted to INR8.01 lakh
crores.
A stimulus package of a cumulated magnitude of The total PSBR is estimated at 15.60% of FY21 GDP.
INR20.97 lakh crore has been announced during the This includes (a) fiscal deficit of 7.1% of GDP for the
period 26 March 2020 to 17 May 2020 for the Indian center which would be required to cover the shortfall
economy, of which the additional budgetary cost is in revenues and non-debt capital receipts, the impact
limited to only 9.7% of the total package. As compared of lower nominal GDP growth and to accommodate
to the FY21 budget estimates (BE), both the central and the stimulus package while maintaining the budgeted
state governments would suffer a significant revenue expenditures, (b) fiscal deficit of 5.0% of GDP for states
erosion due to the lower FY20 tax base and lower and (c) borrowing requirement of 3.5% of GDP of public
growth prospects in FY21. Recognizing this, the central sector enterprises. Against this, the available sources of
government has announced its revised gross borrowing financing consisting of excess savings from household
program for FY21 uplifting its fiscal deficit from 3.5% and private corporate sectors (7% of GDP), savings of
to 5.7% of the GDP. Additionally, borrowing limit for the public sector (1.5% of GDP) and current account
states has also been relaxed from 3.0% to 5.0% of their deficit (1% of GDP) add to only 9.5% of GDP, leaving
respective gross state domestic products subject to a significant financing gap of 6.1% of GDP. Some of
certain conditions. the channels through which this gap may be filled up
include monetization of fiscal deficit, borrowing from
While the need for a large fiscal stimulus to support
multilateral institutions including the IMF, and borrowing
relief and stimulus measures is paramount, the available
from non-resident Indians (NRIs).
resources for the government appear to be highly
constrained while matching the public sector borrowing
requirement (PSBR) with the sources of its financing.
India has stepped into the COVID-19 crisis on the back
of two successive years of fiscal slippage where the
central government had to provide for a countercyclical
relaxation of 0.5% points of the GDP, each from their
respective targets in FY20 (RE) and FY21 (BE). India
is far more handicapped at present as compared to the
2008-09 crisis when we experienced five successive
high growth years over the period FY04 to FY08. The
average growth rate during this period was 7.9%. In
FY08, the combined fiscal deficit of the central and state
governments was also at its lowest at 4.1% of the GDP.
7

b. Exit strategy
India’s lockdown has continued for more than two
months. It was characterized by minimal economic
activity. Whenever the economic activities resume, they
may not normalize for a long period of time. In fact,
their resumption needs to be undertaken according
to a well-thought out exit strategy. Different output
sectors may resume activities at a different pace as the
pandemic is gradually brought under control. Sectoral
targeting of fiscal stimulus should be synchronized with
the opening up of the relevant sectors. India’s FY21
growth would depend critically on the pace of opening
up of the sectors and the effectiveness of monetary and
fiscal stimulus.
Concluding observations
There is an urgent need to
reprioritize budgeted expenditures
in favor of health-related
expenditures including health
infrastructure. In terms of rebooting
the economy, new manufacturing
capacity needs to be attracted in
India which would require additional
budgetary allocation. In fact, both
revenue and expenditure side
estimates of the central and state
budgets, which were only recently
presented in the Parliament and
respective legislatures, would need
to be overhauled. As things begin to
normalize, there may be a need to
present new full year budgets since
the existing budgetary numbers
have been rendered irrelevant by
the onslaught of the economic
pandemic.
8

Agneshwar Sen
Associate Partner, Tax and
Economic Policy Group, EY India
Trade policy
scenario in post-
COVID-19 era
The COVID-19 pandemic is likely to be that inflection
point in the history which changed the nature of the
post-World Trade Organization (WTO) global trade policy
environment. The last time the world witnessed a similar
situation was in 1995 when the WTO was established,
creating a rule-based global trading system. As of
December 2019, when China first informed the World
Health Organization (WHO) about the corona virus1,
the last of the judges at the Appellate Body of the WTO
retired without their replacement being appointed by
the WTO Members. This, in effect, has removed the
most important tool by which the order was maintained
by the WTO, impacting its ability to ensure adherence to
its rules by its members.
1 https://www.who.int/emergencies/diseases/novel-coronavirus-2019/events-as-
they-happen
9
The impact of COVID-19 on trade and economy is already
visible. It has led to reduction in demand and collapsing
trade flows. Supply-chain disruptions have questioned the
resilience of production networks, whether regional or
global, on which the world has been dependent on in the
post-WTO period. Economists are comparing the lockdown
with the Great Depression of 1930s and the financial crisis
of 2008-09.
The WTO estimates world trade to
fall by 13% to 32% in 20202.
Global institutions are trying their best to soften the
impact of this pandemic on the world’s economy. The
World Bank has released a guidance note on Dos and
don’ts of trade policy in response to COVID-19’. The note
encourages governments across the world to ease out the
restrictions for trade in essential medical goods and food,
by removing the need for applications, licenses, etc. It
further encourages them to support exporters to maintain
jobs and foreign exchange earnings, and to contribute
to macroeconomic policy efforts to shield the economy
from the downturn caused due to the pandemic. Whether
countries heed this advice, or the protectionist tendencies
strengthen is the question to ask.
Even before the pandemic struck, there were a series of
disruptions in the global trade policy environment, led
by unilateral and sometimes arbitrary actions. These
were in the form of imposition of punitive import duties,
withdrawal of Generalized System of Preferences (GSP)
benefits and renegotiation of free trade agreements by a
few countries. In India, too, the signs of the trade policy
turning inward-looking were appearing.
2 https://www.wto.org/english/news_e/pres20_e/pr855_e.htm
These signs include India’s hesitation in signing on to the
Regional Comprehensive Economic Partnership (RCEP)
Agreement without inclusion of specific measures to
protect its interests, increase in anti-dumping and other
trade protection actions and increasing its import duties
and new import licensing requirements.
In the post-pandemic environment, many countries are
likely to intensively dedicate their efforts towards rebooting
their industries and protecting their vital and essential
supplies. Ensuring availability of essentials for the future in
case such a pandemic situation arises, can be achieved by
protecting their critical domestic industries and diversifying
their supply chains, both of which would require targeted
policy measures. Trade policies can, thus, be expected to
become more conservative.
The conservative approach is likely to be reflected in the
national trade policy of countries in multiple ways, such
as by increase in import tariff and covert or overt non-
tariff barriers like licensing procedures, import and export
quotas, and in maintenance of their strategic reserves.
Countries may also look to defend their existing domestic
industries through increased recourse to trade remedial
measures, such as, antidumping duties, anti-subsidy duties
and safeguard duties. This would be necessary for the
domestic industries, not inherently efficient, to retain their
profitability.
For India, the rising global uncertainties relating to
the existing supply chain, including their competition
with China, might surprisingly bring them an array of
opportunities post the pandemic. Several reports suggest
that some American and European manufacturers intend
to relocate their factories out of China or at least have
alternate sources in geographically diverse locations.
Japan is reported to be offering support to its industries
to relocate back home. Going forward, this may provide a
good opportunity for India to attract foreign manufacturers
to relocate their factories here. To this end policy measures
that include focused investments in infrastructure and
incentive measures that offset the inherent problems
of operating here will be necessary. Creating a foreign
investment-friendly policy environment, focusing on
sectors that amongst other objectives, would also
substitute India’s import needs, may be India’s best bet to
get a head-start in reviving the economy.
It will be interesting to see how the
world will deal with me-first trade
policies, especially with the WTO not
in a position to enforce its own rules
Contribution by:
Garima Prakash, Senior Tax Professional, EY
10
COVID-19 impact on
mobile workforce and
PE implications

Amarpal S. Chadha
Tax Partner and India Mobility Leader, EY

COVID-19 has changed the way we live. The resultant international

travel bans, immigration suspensions, lockdowns and restrictions
on movement of people have transformed the way people work
across the globe. This has also temporarily halted the cross-
border movement of employees. However, for business continuity,
employees are working remotely on their projects from their home
countries, host countries or a country, where they may be stuck due
to travel restrictions. This has triggered numerous implications for
both employees and employers from immigration, social security,
tax, labor and employment law perspectives.
Most employers and employees are aware of the implications of immigration violations.
However, several other critical aspects also need to be considered. For instance, employees
who are on assignments but are working from home countries due to the pandemic, can
expose themselves and their employers to tax risks in both geographies. The following are
some of the implications:

11
Residential status of the employees
Under the domestic tax laws of most countries, residential
status of individuals is determined based on the duration
of their stay in that country. There are two possible
scenarios:
1. Employees who were on short visits/casual visits to
a foreign country, could attain tax residency in that
country due to prolonged stay.
2. Employees who were on an assignment to a foreign
country but returned to their home country for a visit,
could attain tax residency in the home country.
Taxation and reporting requirements
The above scenarios can result in requirements such as
reporting of employees’ worldwide income, paying tax in
additional jurisdictions, payroll requirements for employer
and double taxation for the employees in some cases.
Also, the fact that employees are now working remotely
for their host /home entity may expose the employers
in the host/home country towards creating a Permanent
Establishment (PE) in the home/host/a third country
where the employee is present. Hence, both employers
and employees should closely monitor the duration of the
employees’ stay and ensure appropriate tax compliances
are undertaken in a timely manner.
The extended stay by employees in this case is force
majeure and as a result of the pandemic. It is not due to
the requirements of their employers/businesses or the
employees’ own will. Hence, it is essential for the Revenue
authorities to make exceptions in tax laws in this situation.
As per the recently published, OECD Secretariat Analysis
of Tax Treaties and the Impact of the COVID-19 Crisis
(the Analysis), “the exceptional and temporary change of
the location where employees exercise their employment
because of the COVID-19 crisis, such as working from
home, should not create new PEs for the employer”.
In the Analysis, it has also been noted that it is unlikely that
the COVID-19 situation will create any changes to the PE
determination.
Basis this, the Organisation for Economic Co-operation and
Development (OECD) has recommended tax administrations
across the world to provide guidance to address tax issues
created by the cross-border employees due to various
restrictions imposed currently, and to minimize unduly
burdensome compliance requirements for the taxpayers.
The OECD recommendations are only guiding principles
and are not binding on member countries. Hence, they
have no impact on domestic tax laws. This could, however,
encourage countries in making necessary amendments to
their domestic tax laws as per their circumstances. Also, for
non-member countries, although the recommendations are
not applicable, they may act as a useful aid for determining
the tax policy on cross-border tax issues arising in this
unprecedented situation.
The tax authorities in the US, the UK, Ireland, Australia
and India have issued guidelines on relaxation of tax laws
for employees impacted by COVID-19. HM Revenue and
Customs (HMRC) in the UK has introduced guidelines
around exceptional circumstances that are to be considered,
to establish if any time spent by individuals in the UK
can be ignored for the purposes of the various counts of
their presence in the UK for determining their residency.
According to the guidelines, the days spent in the UK may
be ignored if the individual’s presence in the UK is due to
exceptional circumstances beyond their control. This will
usually apply to events that occur while an individual is in
the UK and which prevent them from leaving the UK.
The US Treasury and Internal Revenue Service announced
guidelines stating that under certain circumstances, up
to 60 consecutive calendar days of US presence by an
individual, presumed to arise from travel disruptions
caused by COVID-19 will not be counted for the purposes
of determining the individual’s US tax residency. Similarly,
US business activity conducted by a non-resident alien
or foreign corporation will not be counted for up to 60
consecutive calendar days in determining whether the
foreign corporation has a US PE.
The Central Board of Direct Taxes (CBDT) in India,
considering the genuine hardship caused by the
lockdown has announced a relaxation in determining the
residential status of individuals who have come to India
on a visit prior to 22 March 2020. Their presence in India
during the specified period (i.e., from 22 March 2020/
date of quarantine till 31 March 2020/ date of departure
before 31 March 2020, as the case may be) will not be
considered for determining residential status in India for
tax year 2019-20. In addition, the Indian Government
has also extended the due date for filing India tax return
for individuals from 31 July 2020 to 30 November
2020. Further, the Government has reduced the rate of
contribution to Provident Fund (PF) of both employer
and employee for all establishments covered under the
PF regulations from 12% to 10% each for the next three
months.
Way forward
Similar guidelines by the governments across
the world would be a welcome move to put
internationally mobile employees and their
employers at ease in these testing times. Until
then, it is essential for employers to keep
abreast of these developments, track their
employees and their stay and remain on top of
the various compliances.
Contribution by:
Ammu Sadanandhan, Senior Manager,
People Advisory Services, EY India
12
Countering Covid:
a GST perspective
COVID-19 got its ignominious pandemic status from the
World Health Organization on 11 March 2020. However,
the global economy has already caught the flu. India got
directly afflicted only in March and given the lockdown,
tax collections (including GST) in the first quarter of this
financial year is expected to be a washout. The fiscal
implications are not minor.
Uday Pimprikar
Partner and National Leader –
Indirect Tax, EY India

13
The pandemic is evidently an unprecedented crisis. Past crises were primarily financial
in nature, which in turn impacted the other spheres of economic activity. The current
one is primarily driven by cessation of economic activity and is threatening to turn into a
massive financial flu.
The government has taken several steps to ensure that the financial contagion is
arrested. Similar proactive measures in GST are perhaps imperative regardless of the
fiscal strain.

Decoupling the GST chain

GST rates in India are fairly high and to ensure compliance, the prescribed framework is rigid.
A taxpayer cannot file returns unless they pay the entire tax due. Moreover, a customer is
allowed input tax credit, to the extent that their supplier has paid taxes to the government.
Further, unlike bulk of the GST world, India does not give any leeway to adjust tax liabilities
in case of bad debts. It is evident that such an interlinked ecosystem has the potential of
exacerbating the expected ensuing financial crisis and needs to be decoupled.
To enable this, the following needs to be done:

• Delinking payment of taxes from other compliance requirements and allow taxpayers an
ability to pay taxes after a moratorium and in instalments.
• De-risk a taxpayer from the defaults of other stakeholders in the supply chain. Allow a
taxpayer to collate credits basis invoices received and permit adjustment of taxes in case
of debt defaults.
• Keeping in abeyance several amendments notified recently for exports. Just before
the pandemic hit the economy, the government had notified amendments in relation
to export refunds, disallowing refunds where consideration was not received. This will
result in importing the global financial turmoil and materially impact Indian exports.

14

Cash conservation
At present a taxpayer needs to pay their tax liability both
on their sales and some defined procurements (such as
imports). In most cases, the tax payable on procurements
is akin to an advance payment of taxes, as taxpayers are
entitled to claim input tax credit. There is an urgent need
to relax norms that necessitate this advance payment.
Taxpayers should be allowed to utilize accumulated credits
for payments of both output and input taxes (reverse
charge).
Release refunds and
incentives
Administration has been proactive in the release of GST
refunds related to exports. However, there is a need for
more to be done to ensure a more pervasive efficient
administration of refunds. To this end, a campaign to
drive refunds needs to be initiated at a structural level.
Clarifications and instructions on issues that impede
refunds should be issued and a robust mechanism to
continuously removing roadblocks are required.
Survival and revival
equally relevant
The government is looking at formulating financial
stimulus and this could include deferral of tax payments
and remission of taxes paid linked to employment. In this
regard, ensuring availability of cash to sustain operations
and investments is important.
Further, some of the impacted sectors are not going to
witness any reasonable revenue at least for a few months.
Their stress needs to be contained. Financial support can
be given by as removing elements in the GST legislation
that lead to cascading taxes. This includes considering
micro elements such as expanding avenues that allow
refunds of blocked input tax credits and inverted duties as
also reducing the list of disallowed credits such as input
tax credit of taxes paid on inputs that go into construction
of civil construction such as airports, leased commercial
buildings, as also macro reforms such as expanding the
ambit to GST to include sectors such as aviation turbine
fuel, petroleum, real estate, etc.
It is important to acknowledge that the changes in supply
chain forced by the crisis come bearing opportunities.
Incentives and schemes - encouraging production and
employment, such as accelerated credit/refund regime,
instituted under the GST law are effective. Similar schemes
under the erstwhile VAT and excise laws have driven a lot
of growth and investments in the past when conceptualized
well. There are credible examples of the same and
therefore should be considered.
Contributions from -
Sonam Bhandari, Senior Manager,
Indirect Tax, EY India
15
Should tax
keep pace with
transformation,
or help shape it?
ey.com/en_in/tax #BetterQuestions

© 2020 Ernst & Young LLP | All Rights Reserved.

16
 Has COVID-19 made
India a more favorable
investment destination?
The outbreak of COVID-19 has brought a dramatic transformation to
how businesses ideate and operate, forcing them to critically reassess
their future plans. The outbreak happened at a time when the global
economy was already showing signs of a slowdown. This has fueled
anxiety among institutional investors and led to immense anticipation
among them about government support to the industry. It is also
becoming increasingly evident that this pandemic would continue to
have repercussions in the foreseeable future. Investors now need to
focus on effective planning more than ever before.
Here, we have briefly touched upon the key factors currently affecting investor mindsets and
decision-making towards India as an investment destination

Bhavesh Thakkar
Partner, Indirect Tax, EY India

17
 The current geopolitical climate is causing a rejig of
global investment destinations
Trade and industry mindset has shifted in recent years. Companies have increasingly started identifying
Asia Pacific nations as manufacturing destinations. Among them, China has been a favorable destination in
attracting investments due to its emergence as a global manufacturing hub.
The US-China trade conflict and Make in India are some of the agendas that institutional investors actively
consider nowadays during strategic business discussions. Due to COVID- 19, many international investors
with a manufacturing presence in China are facing unprecedented supply chain disruptions. News reports1
indicate that countries hitherto heavily dependent on China may now consider other manufacturing
destinations. In fact, Japan has taken a step further by announcing a US$ 2 billion stimulus package to
support Japanese investments moving out of China.

Owing these developments, a massive geographical rejig of

manufacturing hubs seems likely. Several developing nations are
emerging as vying contenders. India, with its multifaceted industry
initiatives may emerge as a globally preferred investment destination,
if it is able to align to international standards of industrial support.

1 reported by News18 on “India-South Korea Trade Ties to Further Improve in Post Covid-19 World With Make in India
Boost” on 21 April 2020, 12:25 PM IST

18
 Macro-economic scenario and incentives in India

Conventionally, institutional investors consider the availability of resources and infrastructure as key Thus, while it appears that too much is changing
factors for investment decisions. However, the industry is currently experiencing an extraordinary liquidity too fast, this may just be just the tip of the iceberg.
crisis, further intensified by the currently prevailing lockdown in most countries. At such a time, any Investor agility is now of paramount importance.
form of government support to keep operations afloat is a welcome measure. Generally, this support is Investors may lay higher emphasis on quicker returns
extended by way of economic reforms and infrastructural support or fiscal incentives. Both have a direct now. Hence, infrastructure and incentives support
positive impact on investor cash flows. Let’s take a closer look at these factors. assume even higher importance in decision making.
At the same time, it is also foreseen that investors
Macroeconomic reforms and infrastructural support may adapt a cautious approach, leading to growth
concentration in a few sectors.
In India, the current situation has created additional stress on core sectors such as banking, financial
services, power and telecom and also revealed some glaring deficiencies. The strength of these sectors
determines the extent to which industries flourish. Further, to enable the industry, the government
announced some ambitious measures such as: The need of the hour is empathetic,
• Creation of dedicated National Investment and Manufacturing Zones (NIMZ) and focus on pointed relief measures for
industrial corridors which would serve as fully enabled plug and play facilities for manufacturing
activities industry. As a nation, India
• Creation of dedicated Coastal Economic Zones/ Units (CEZ/CEU) and industrial corridors to enable should look beyond the current
logistical ease methodology and rapidly enable
The steady implementation of several such initiatives led to a jump in India’s Ease of Doing Business a unified approach where the
(EODB) ranking from 140 to 63 in October 2019. The implementation of these initiatives is likely to gain
further momentum in the coming days.
center and state collectively work
to build and sustain industry. Such
Industrial incentives in India measures are the key and may
The Government of India took cognizance of investor needs and launched the noteworthy Make in ensure that India adapts well to the
India initiative, which has been quite successful. Multiple incentives schemes at the central and state
levels were introduced under this flagship initiative. Further, a reduced income tax rate of 15% for new geopolitical climate of tomorrow.
manufacturing companies was introduced to bring India at par with other developing nations. These
initiatives have been applauded by domestic and foreign investors alike.
Recently, some lucrative incentives schemes for electronics manufacturers were also introduced,
and are generating considerable interest. Similar initiatives for other sectors are also envisaged. The
pandemic has also placed the limelight on sectors such as healthcare, retail etc. Incentives are also
being announced to promote these sectors. For example, the state of Tamil Nadu has introduced fiscal
incentives for the manufacture of drugs and equipment employed in the management of COVID- 19.

19
 Will COVID-19 What is gig economy?

accelerate adoption
A gig economy is a digital labour and talent market helping
organizations meet their workforce demand for short-term
engagements by hiring independent workers via online
platforms that connect gig (temporary) worker with the

of the talent organization.

marketplace model? Organisations seeking

talent for short term
assignments
With everyone in lockdown mode,
organizations and their people
across sectors and across levels,
have accelerated adoption of online
collaboration platforms. While a lot is Online platform
connecting the service
being said and done to focus on health
recipient and provider
and safety of people and the potential
impact to the economy, sub-consciously,
the talent in each organization has
adapted to a new way of working.

Ajit Krishnan This transformation enabled by online Free lancers/ contingent

Partner and Tax Talent
platforms has created the framework for workforce offering goods/
Leader, EY India the gig economy. services for a price

20
A gig worker is not bound by an employment contract rather is engaged on a task-based
assignment connected via an algorithmic matching system. The gig workers can work for
Tax and regulatory
multiple organizations at any given point in time. implications
For talent marketplace
Listed on operator
Talent Marketplace Taxability
(Operator)
An online talent marketplace, which qualifies as a
non-resident e-commerce operator (ECO), would
be subject to Equalisation Levy (EL) at the rate of
Server 2% on consideration received or receivable against
Payment for
e-commerce supplies or services (provided such amount
services to
exceeds ₹ 20 million). The income on which such EL has
Operator after
been paid will be exempt from income-tax.
appropriate tax
withholding The non-resident ECO will have to ensure payment of EL
to the Government treasury on a quarterly basis and will
have to file an annual return to report such amount(s)
deducted and deposited with the Government.
Payment net
Where online talent marketplace is a resident, the
of operator’s
income would be subject to tax as its business income.
commission
Taxes would be appropriately withheld under domestic
and taxes
law provisions by the buyer depending on nature of
services rendered.

Withholding obligations
To widen and deepen the tax net, government also
Buyer of services introduced withholding tax obligation on ECO for sale
Gig workers/ (End user)
Provision of services of goods or provision of service facilitated by it through
Sellers
its digital or electronic facility or platform (@1% on
the gross amount paid to the e-commerce participant
subject to an exception for individuals/ HUFs in some
cases).
However, if gig workers qualify as employees,
withholding would be required to be undertaken as
salary payment.

21
GST obligations
Under GST law, an online talent marketplace, irrespective of whether it is foreign or
domestic, is required to collect and deposit Tax Collected at Source (TCS) at the rate of
1% on all taxable supplies made by other sellers in India, where consideration for supply
is collected by them.
In case the service supplied by seller is exempt from GST, there should be no TCS
requirement.
Foreign marketplaces will however need to appoint a person in India to take GST
registration (authorized representative). Multiple GST registrations may be required
depending on the States from which sellers are rendering services through marketplace.
Fee/commission earned by talent marketplace from gig workers/buyers may also be liable
to GST at 18% (depending on whether the place of supply is in India).
Permanent establishment
In case of online talent marketplaces which qualify as non-resident ECO, depending upon
whether workers qualify as dependent or independent personnel, risk from permanent
establishment perspective would need to be evaluated.
For gig workers
Taxability
Where the gig workers are resident under domestic tax laws of India, entire income
accrued or received by such gig workers should be subject to tax in India. In case of
certain eligible class1 of gig workers, having a gross turnover less than ₹ 5 million, the
presumptive tax mechanism provides for a 50% expense allowance. Consequently, the
effective tax rate for such individuals could be lower compared to salary income from
employment. Further, in case of double taxation, benefit under the Double Taxation
Avoidance Agreement, if any, may be explored.
Where gig workers qualify to be non-resident under domestic tax laws of India, only
income received in India should be subject to tax in India. Benefits under the respective
Double Taxation Avoidance Agreement between India and the country of residence of
such gig workers should be available.
1 Legal, Medical, Engineering, Architectural profession, Accountancy, Technical consultancy, interior
decoration and other professions as may be notified
The contract/ arrangement between the online talent marketplace and gig workers would
need careful evaluation to determine whether the gig workers qualify as dependent
or independent workers and whether payment received by such gig workers would be
taxable under salary or professional fees. This could influence the preference of such
individuals.
Labour laws/ social security benefits
Applicability and consequences under labour laws, social security regulations, minimum
wage guarantee, etc. would need to be evaluated depending upon whether gig workers
are resident or non-resident and whether such gig workers qualify as ‘employees’, which
would in turn depend on factors such as control over a gig worker, supervision and right
to initiate disciplinary action.
GST implications
In case a gig worker has an aggregate income of ₹2 million2 and below, there is no
requirement of GST registration.
Registered gig workers will be required to discharge GST at applicable rate, on services
rendered to buyers through talent marketplace, provided place of supply of such services
is in India. GST compliances would also need to be undertaken.
1% TCS collected and deposited by the talent marketplace will be available as credit to
the seller.
For organizations availing services of gig workers
Deductibility & withholding
Payments made by organizations to platform operators should be deductible as business
expense, however, such payments would be subject to withholding depending on whether
the talent marketplace is resident or non-resident.
GST implications
GST registered buyers should be eligible to take input credit of the GST charged by the
seller or talent marketplace.
2 ₹ 1 million and below for certain special category States
22
 Legal implications on talent marketplace model
For talent marketplace
Recognition under Code of Social Security, Compliance in multiple jurisdictions
2019 (Code)
The code recognises ‘gig workers’ and ‘platform workers’
and stipulates framing of welfare schemes for such
workers. The talent marketplace may be required to make
contributions in this regard and undertake compliances,
once the code is notified.
Terms of engagement agreement
Prolonged term of engagement, right to terminate,
supervision or control by platform operator may accrue
status of an employee to a gig worker thereby entitling
the worker to employee benefits under Indian laws.
Hence, the engagement agreement needs to be drafted
carefully.
Non-compete/ solicit
Non-compete, non-solicit clauses may need to be drafted
appropriately, considering ability of gig worker to work on
various platforms.
Confidentiality
Stringent confidentiality obligations regarding information
belonging to platform operator and/or customers may need
to be expressly enumerated.
Intellectual property
Right of ownership over intellectual property related to work
product may become a challenge and may be mitigated by
expressly stipulating in the engagement agreement.
Compliance with varied laws of different jurisdictions as well
as industry specific laws may be required.
Data privacy laws
The talent marketplace, as well as the gig worker, may be
required to comply with stricter data privacy laws while
collecting, handling, storing or processing information.
“
Dispute resolution
Unlike a traditional industrial dispute that may be resolved
by conciliation or negotiation, any dispute arising between
Stringent confidentiality
the platform operator, gig worker and/or customer will be obligations regarding
governed by their respective contracts/ terms of service and
will be subject to consequent litigation. information belonging to
platform operator and/or
For Gig workers customers may need to be
expressly enumerated.
Health and Safety
Considering gig workers will not perform their work out of
a fixed workplace, applicability of health and safety laws
such as respective shops and establishment acts, sexual
harassment laws may become a challenge.
Compensation in case of accident
The applicability of laws providing compensation to gig
workers in case of accidents is yet to be tested in courts.
23
 Regulatory implications on talent marketplace model
For talent marketplace
Intermediary/payment aggregator guidelines
In India, RBI has issued intermediary or payment aggregator guidelines, applicable primarily
on marketplaces who are collecting any payments from buyers on behalf of sellers. Said
guidelines stipulate the opening of separate bank (nodal) account and timelines within
which the amount should be credited to bank account of sellers. Similar guidelines in other
jurisdictions needs to be checked.
FDI guidelines on e-commerce on service marketplace
At present, regulators have not taken a consistent position on applicability of FDI related
regulations in case the platform operator is an FDI entity in India. Hence, clarity on
applicability of FDI guidelines would be critical.
Transactions with platform operator in one jurisdiction and both buyer and seller in
same but different jurisdiction
Where the talent marketplace is overseas, and both the other parties are in India, there
could arise a likely scenario where a rupee transaction is getting routed through overseas
channel involving foreign currency and the same could pose a challenge under payment and
settlement guidelines and FEMA. Similar challenge can also arise in a scenario when the
platform operator is in India and both the other parties are overseas.
Receipt of payment on behalf of non-resident
Collections by payment operator in India on behalf of
non-resident seller could be challenge under FEMA
regulations and specific RBI approval may be required.
Applicability of import and export guidelines
In case where any of the three participants are located
overseas, cross border payments would tantamount
to import or export of services and hence, import/
export guidelines as prescribed by RBI would need to be
followed. In addition, applicability of third-party payment
guidelines would also need to be analysed.
Reporting mechanism
Presently, RBI does not stipulate any reporting
mechanism for the export/import of services (other than
‘software’ related exports/ imports). Hence, reporting
mechanism in relation to such export/ import of gigs
may be required to be designed to regulate this model.
24
 While there are challenges in implementation and
Should organizations in India migrate to a talent marketplace model? regulating a gig economy, it has the potential to be
the next big revolution in employment and workforce
outlook. The current market situation has accelerated
Organizations can take advantage of the gig economy to drive their diversity and inclusion agenda. While such movement would the need for agile organizational structures fuelled by
bring certain challenges on one hand but alongside provides various benefits in improving operational efficiencies and agile talent. Therefore, large organizations, will begin
reducing costs. their transition towards a gig economy.

Promoting diversity and inclusion:

On demand workforce:
Companies can take advantage
Flexibility and improved The immediate step however,
Organisations can tap on idle productivity: Migrating employees
hours among the talent pool
of the gig economy to get access
to a Talent marketplace model
would be to create an internal
to diversified and untapped
by assigning them to different
talent and engage with specific
provides greater flexibility, talent marketplace within the
projects/ workstreams/ teams diversified experience and
talent communities for business organization, to make sure that
with shortage of manpower. It continuous learning opportunities
collaboration. Such platforms also people can be deployed and
provides a much more effective to the workers and alongside
enable differently abled talent to also
and efficient talent pool to
access job opportunities in a fair and
competitive advantage to the utilised more effectively and
perform on projects and tasks. organisations.
transparent manner. efficiently. This would definitely
enable greater efficiency without
Controlled costs: Having a talent the challenges and complexities of
Manage uncertain business Improved employee satisfaction:
marketplace instead of employees on
climate: In times of Given that the revenue model for
transitioning from an employment
payroll, can provide greater flexibility to
re-allocate various costs associated with
business uncertainties, gig workers is directly linked to their agreement to an engagement
organisation can manage efforts, it would result in improved
social security, labour laws, long service agreement.
the risks of employee employee satisfaction and lesser
rewards based on the number of hours
layoff. resentment.
utilised.
It is however entirely up to corporations, legal
specialist, lawmakers and workers’ associations to
Loss of employee status: An employee start evolving the model, to keep pace with such
Exposure to litigation: Unlike Novation of contracts: The shifts in their talent and labor market.
migrated to a talent marketplace shall
employees that are protected organisation will have to
become ineligible for social benefits
against litigation under the cover enter into new engagement
such as insurance, gratuity, medical Contributions from -
of the organisation to which they contracts setting out detailed
benefits, provident fund etc.; and shall
belong, a gig worker may be and strict terms of engagement Senior Tax Professionals of EY: Ayush Moodgal,
not have any employment-related
exposed to litigation for deficiency in lieu of existing employment Kapil Manocha and Komal Grover
rights provided under various labour
of services. agreements. Nishant Arora of PDS Legal
laws.

Issue 18 25
Tax breaks
for Covid-19
spend - ripe for
amendment?
The Covid-19 outbreak in India has triggered
significant demand for spend on related
preventive, detective and remedial/relief
measures. Alongside the government, a large
number of companies have been contributing
extensively in one or more of these areas.
However, the current scheme of tax benefits
available to such corporate spend is restrictive and
merits a rethink.

Bharat Varadachari
Tax Partner, Accounting,
Compliance and Reporting, EY India

26
 Section 80G Section 37
Section 80G of the Income Tax Act, 1961 (‘Act’) provides a The current problem however, arises due to the explicit disallowance under Section 37 of the Income
100% deduction (without limits) from the Gross Total Income Tax Act (ITA) which provides that any expenditure incurred on activities relating to CSR referred to
(GTI) of a company for contributions inter alia to the PM in Section 135 of the Companies Act 2013 (CA) shall not be deemed to be an expenditure incurred
National Relief Fund, CM Relief Fund and PM CARES Fund. for the purpose of the business or profession. The argument provided by the government for the
Contributions to registered NGOs engaged in charitable disallowance is that CSR represents application of income and allowing a tax deduction will result in
activities are eligible for a 50% deduction (subject to a limit of subsidising one-third of such expense to be incurred by corporates by way of tax expenditure.
10% of GTI) of the company. Covid-19 targeted contributions
The Ministry of Corporate Affairs has clarified in its circular that spending CSR funds for Covid-19
to these funds or eligible NGOs are hence eligible for the
related activities for promotion of health care including preventive health care and sanitation, and
related deductions.
disaster management shall qualify as CSR expenditure and that these activities should be interpreted
By way of a welcome move, companies that have not opted liberally for this purpose. Basis the above, spend on Covid-19 activities would automatically be
for the concessional tax regime for FY21 and who make treated as CSR activities and be disallowed in computing taxable income.
contributions between April 1 and June 30, 2020 can now
Several questions have arisen on the permissibility of the deduction in varying circumstances.
chose to avail the Section 80G deduction for either FY20 or
Illustratively, whether Covid-19 expenditure in excess of the statutory obligation of 2% of the past
FY21. It has also been provided that companies availing the
3 years’ average net profits would be deductible? Whether Covid-19 expenditure that is voluntary
concessional tax regime who contribute between April 1 and
in nature for a company not subject to CSR obligations would be deductible? Whether Covid-19
June 30, 2020 can claim an 80G deduction for FY20 without
expenditure not treated / accounted by the company as CSR would be deductible? Basis the current
compromising access to the concessional tax regime for FY21.
law, expenditure in excess of the statutory CSR obligation is likely to be subject to a disallowance
However, several companies prefer to undertake relief under Section 37 of the ITA, however, it is arguable that voluntary expenditure or expenditure not
activities by themselves, directly incur the CSR spend or accounted as CSR is deductible, based on a specific judicial precedent.
contribute in kind rather than contribute to a fund (for
The Government’s speed in providing regulatory relief (compliance relaxations or extensions of time
which they do not have any visibility on the spend). In these
limits, indirect tax benefits for Covid-19 related imports etc) as a response to the unprecedented
situations, there is lack of full clarity on tax benefits for such
circumstances triggered by the Covid-19 crisis are commendable. For its part, corporate India has
direct expenditure incurred by the companies. Besides, for
also come forward to contribute in a variety of areas – medical equipment, health kits, treatment
those who do contribute to the above prescribed funds, the
facilities, provision of essential supplies, relief and prevention measures, training and education of
deduction is available for 100% of the donation subject to the
public/healthcare workers and accommodation facilities.
GTI and in case of registered NGOs, to 50% of the donation
subject to 10% of the GTI, as the case may be. In view of the above, apart from the Section 80G deduction/clarification on CSR eligibility and in
light of prevailing ambiguity, the government might wish to consider allowing a full deduction under
Conversely, a direct tax deduction in computing a company’s
Section 37 of the ITA for any direct expenditure of a prescribed nature incurred towards Covid-19
business income may be more beneficial as apart from an
activity, while computing taxable income for FY20 and FY21 even if the expenditure is classified
unlimited qualifying amount, the deduction is also not subject
as CSR for corporate law purposes. An external certification mechanism and inclusion of this item
to an overall ceiling (like in the case of the Section 80G
as part of the tax audit requirements under the ITA would help validate and verify the spend. This
deductions). This would enable a company to fully benefit
measure would go a long way in incentivizing corporates for their, direct social contributions in a
from the spend by lowering its business tax base or enhancing
stressed business environment.
its net loss position, if any, for tax purposes.

27
Indian conglomerates should
employ strategies to retain
and protect existing resources
With World Health Organisation declaring COVID-19 virus outbreak as a pandemic,
governments across the world rushed to take steps to contain the spread of the virus.
They included imposing restrictions on movement of people and announcing nationwide
lockdowns. Naturally, businesses across the globe started to witness significant
disruptions to their operations with issues arising on all fronts. These issues, impacting
businesses and economies, comprise supply chains, workforce management, short-
term finance management, and customer and brand protection. As true for businesses
globally, Indian companies are also experiencing considerable disturbances in operations
during these times. They are simultaneously giving rise to new business and tax risks,
especially where cross border/ outbound structures are in place.

Raju Kumar
Tax Partner, EY India

28
 Risk of creating permanent
establishment (PE)
Employees travelling to an overseas country for work
and getting stranded in the host country on account of
travel restrictions may not only trigger domestic tax law
residence for himself, but may also risk establishing a
permanent establishment (PE) of Indian parent in certain
circumstances. It is quite possible that in times such
as present, employees may need to work in a country
that is not their usual place of work/ residence for an
extended period of time, which may lead to unusual tax
implications that are beyond the control of employers
and employees. Various companies have cited concerns
related to the creation of PEs and change to residence
status of individuals. To address the nervousness around
these issues, the Organisation for Economic Co-operation
and Development (OECD) has published guidance
that encourages countries to team up to alleviate the
unplanned tax implications and likely burdens arising due
to effects of COVID-19 crisis.
Cash repatriation and movement
strategies to be deployed
Considering disruptions to global supply chains and
international trade, entities may potentially face working
capital issues. In this situation, opportunities to generate
cash from business operations may be limited. Further,
there could be other factors that may augment liquidity
exposure, including limited accessibility to capital markets
and funding, and increased counterparty credit risks. In
such a scenario, strategies to move cash within the group
from cash rich entities would gain relevance – repatriation
options and subvention payments could be analyzed
keeping in mind the long-term strategy of the group.
Needless to say, transaction costs and timelines to move
cash would play an important role in arriving at a preferred
strategy. Further, efficient and careful deployment of cash
during the period of limited economic activity would go a
long way in sustaining the entity during this time.
Impact of stimulus packages
Policy changes and stimulus packages have been
announced in jurisdictions around the world in response to
the COVID-19 crisis. Such measures range from deferral
of compliance/ payment obligations to additional tax
deductions for specified activities/ cash support in form
of grants and loans. Multinational groups should consider
putting in place a procedure for tracking and availing such
stimulus packages to ensure maximization of value for
their business. This could also open a window to optimize
cash requirements of the group by availing deferrals on tax
payments.
29
 Supply chain risks
Demand volatility due to evolving regulations and consumer sentiment coupled with rapidly
changing supply constraints (raw materials, manpower and transport) can potentially lead
to disruptions and have an adverse impact on business continuity. Supplier failures may
necessitate the businesses to look for alternate ways to fulfil existing contractual obligations,
including rapid re-alignment of distribution channels and product range. Further, creation
of a manufacturing readiness plan to mitigate key operational risks across various demand
scenarios should be a key aspect in formulating a supply chain response to the crisis.
PoEM concerns
Inability to travel by Indian residents who are members of the Board of overseas companies
may raise concerns about a potential change in the Place of Effective Management (PoEM)
of a company where Board meetings are done remotely or through tele-networking from
India. The Indian tax laws retain a right to treat an overseas entity to be resident in India
and consequentially tax global profits of the company where the PoEM of such company is
held to be in India. Considering the extra-ordinary situation, due care should be exercised in
conducting Board Meetings in such cases and potential relief under tie-breaker rule of double
tax treaties should be evaluated.
Revisiting audit procedures for consolidation
Another practical issue that could come up is delay in preparation of financials of overseas
subsidiaries leading to deferred finalization of consolidated financials in India. This may be
especially relevant considering Indian entities follow a March year-end and a majority of
consolidation exercises for listed groups, are conducted during the months of April and May.
Further, considering restrictions on movement of people, unconventional audit procedures
(like video verifications) may see the light of day.
Low valuations opening doors for new acquisition
opportunities
While companies are drawn against a plethora of risks due to economic conditions during
these times, they are also presenting certain opportunities, including prospects to enhance
returns in the long run. Valuation of a number of potential acquisition targets may be
low, given global economic volatility and rapid stock devaluations. It may be worthwhile
to evaluate and revisit outbound investment/ acquisition strategies in line with resources
available with the entity. Further, other restructuring opportunities such as joint venture
partner buy-outs and minority squeeze outs may be cost efficient if the market valuation of
shares is low.
Unpredictability as to how long the pandemic will last
and decrease in overall commercial activity due to virus
containment measures has led to a significant build up in
economic uncertainty. In times such as these, it would be
important for Indian conglomerates to remain patient and
employ strategies that help to retain and protect existing
resources, especially the ones that are key to business (staff,
technology and business partners). Businesses should also
evaluate opportunities to leverage off internal efficiencies
and resources and look to strategize detailed plans to bounce
back once the situation improves.
30
The anti-corona prescription
for transfer pricing
Today, humankind is faced with an unprecedented crisis in the form of the novel
coronavirus (COVID-19). In a globally connected world, cross border movement of goods,
services, people, intangibles and financial flows is imperilled. Consequently, all businesses
are likely to be disrupted. While it is premature to conclude the full impact of this shock,
it is opportune to understand its implications, prepare for consequences and maximize
opportunities through a proactive approach.

Transactions between entities within multi-national groups (MNEs) is a significant

part of global trade. Transfer pricing of these flows is a critical element of the
world’s supply chain and countries’ tax ecosystems. MNEs often have entities
performing centralized functions such as procurement or Intellectual Property
(IP) management. They also engage specific companies within the group to
contract manufacture goods, undertake R&D services and distribute products
and services in identified territories. Management hubs support group companies
in different regions to gain efficiency and foster better controls. Transfer pricing
principles require each of these entities to get remunerated for the value they
create and contribute to the supply chain. This, in turn, has consequences on the
fiscal health of the countries where these entities are present.

Ashwin Vishwanathan
Partner, International tax and Transaction Services,
Transfer pricing, EY India

31
In the present context, companies are likely to face the
following challenges:
• Shut down of commercial operations due to
government-initiated lockdowns
• Labour shortages due to restricted people movement
• Cost escalations due to supply chain interruptions
• Lack of demand resulting in inventory stockpiles
• Forecasting and budgeting issues due to change in
demand and supply patterns
• Breakdowns in traditional distribution channels
• Financial exposure in terms of working capital and
credit management, receivable collections, debt and
banking covenants
• Impact on business continuity planning and governance
There could be many other direct and indirect effects on
businesses. Companies will have to assess how to respond
to these challenges and where the key decisions will be
made. They may also need to determine as to whom such
various risks and associated obligations belong in impacted
intra-group transactions, and whether contracts between
parties reflect this understanding. The financial ability of
entities to bear such risks is likely to be tested.
Maintaining pre-agreed fixed compensation for related
parties like contract manufacturers, contract service
providers and limited risk distributors might become difficult
given the uncertainty of profits and the looming spectre of
losses. Underutilization of capacity due to shut downs and
carrying costs of inventory will only compound this problem.
Performance guarantees, product and service liabilities
and similar legal obligations may get triggered requiring
expending of costs and management time. Recognizing
these early is, therefore, essential. Injecting an anti-Corona
dose into transfer pricing and business planning is the need
of the hour. Here are a few recommendations:
Assess
It is essential to start understanding the magnitude of this
disruption and recognizing areas that need attention. It could
involve rethinking the traditional value drivers in the business
and how it stands transformed to cope with this crisis. Both
demand and supply side factors merit consideration. Similarly,
actual decision- making and risk bearing will have to be matched
with what was done historically and inconsistencies will need to
be explained.
Navigate
As the crisis evolves, companies have to re-imagine their
business strategies. This could take the form of establishing
alternate market routes, vertical and horizontal integration
and divestment of unprofitable divisions. Termination of
existing inter-company arrangements may require exit charge
evaluation.
Test
Testing various scenarios and potential outcomes may be an
important input for financial forecasting and analysis.These
comparisons with actuals will be useful to quantify losses, decide
on subvention strategies and manage funding requirements.
Identify
Internal and external market data should reflect the impact of
the crisis and will have to be assimilated and synthesized for
comparability and future decision making. Impact on existing
policies might have to be examined.
Connect
A company’s approach cannot remain siloed. It has to involve
all stakeholders capable of connecting the dots and crafting a
holistic response. Tax directors and CFOs should collaborate with
business teams to put together a credible commercial strategy
for inter-company transactions.
Operationalize
A revised transfer pricing design and policy may need to
be envisaged for affected areas of business. Modifying
existing practices and implementing new ones might need
operationalizing through systemic alterations.
Reorient
Location of value creating activities and risk control
functions may have shifted due to key executives
being stranded, forced to relocate or working virtually.
Reorienting the operating model to appropriately reflect
Development, Enhancement, Maintenance, Protection &
Exploitation (DEMPE) functions will occupy mind space and
help decide future course of action.
Organize
Responding to the crisis will entail many decisions.
Documenting this carefully ex-ante and building a strong
body of supporting evidence for its underlying rationale is a
necessity for reporting, compliance and audit defence.
Negotiate
Existing inter-company agreements, third party contracts
and Advance Pricing Agreements (APAs) will need to be
revised to factor the impact of the crisis. Companies will
have to consider negotiating these terms again depending
on their facts and circumstances.
Activate
The crisis is still unfolding. It is unknown whether it will
end soon or be prolonged. Companies should activate a
monitoring and response mechanism that is sufficiently
agile to address short term, medium term and long-term
dimensions.
32
Imagine an MNE with manufacturing factories in affected countries, distribution affiliates in Europe and Asia operating its
R&D and shared services centre in India with regional management teams based in South East Asia and the Middle East. If
one were to practically apply the above prescription, the group would have to consider the following steps:
1 Examine which of these critical
functions are worst hit and prioritize
actions accordingly. Manufacturing in
affected countries is an obvious concern
and will have to be addressed first.
3 Undertake a financial analysis to
quantify potential cost increases, losses
and evaluate the cash and tax impact.
5 Set up cross functional teams
comprising legal, tax, finance and
operations personnel to initiate
contingency plans and spur alternate
action.
7 Alter decision making matrices and
organizational hierarchies to gain better
control over processes and governance.
9 Revise already signed APAs and
discussing ongoing APAs with the tax
authorities to reflect new business
10
realities.
While businesses are still trying to
navigate this disruption, companies
must act swiftly, understand and
prepare. Involving professional advisors
2 Identify alternative manufacturing
locations to ensure business continuity.
early in this lifecycle will help bring
to bear deeper sector experience and
insights and generate robust solutions.
Logistics would also have to revisited.
The old adage, “an
4 Consider what other market players are
doing and how they have been
ounce of prevention
is worth a pound of
impacted.
cure” has never been
more relevant or real.
6
Analyse the profits within the supply
chain and recalibrate its allocation
between manufacturing, distribution,
services entities and the principal by
repricing inter-company transactions.
8 Establish internal processes to gather
information and documents explaining
various changes.
Run a ‘war room’ or ‘project
management office’ to maintain and
build supply chain resilience.
33
Key tax amendments
and the way forward
Tax exemption for
Direct Tax Vivad
sovereign funds
Dividend’s tryst se Vishwas:
to boost Infra
with taxation settling the
investments in
unsettled
India

Variable capital
companies: a new
Are ESOPs still
opportunity for
lucrative for
asset managers
start-ups?
and lessons for
India

34
Dividend’s tryst with taxation

Jayesh Sanghvi
Partner, International Tax and
Transaction Services, EY India

1 April 2020
Classical system

There have been frequent revisions and the introduction

of new tax rates for almost a year. Reduction in corporate
1 April 2003
income tax and personal income tax rates has been a
DDT regime
welcome change. The new corporate income tax rate at
25.17%1 (or 17.16%2 for new manufacturing companies),
is well within a competitive range of the global/ OECD
average of ~23%3. 1 April 2002
Classical system
Dividend Distribution Tax (DDT) for taxation of dividends
has fomented debate regarding its desirability since
its introduction in 1997, gathering more heat with the
1 June 1997
steadily increasing rate. With the proposal to remove the DDT regime
DDT and revert to the classical system, the government
has answered another persistent demand of the industry.
1 April 1961
Classical system
1 Base rate 22% + Surcharge 10% + Cess 4%
2 Base rate 15% + Surcharge 10% + Cess 4%
3 Source – OECD corporate statistics database

35
To In the table we have attempted to capture the impact of this change from DDT to the classical system at the shareholder level (with certain assumptions on basis):4 5
6

DDT regime Classical system4

Particulars Resident Resident Non - Resident Resident Non -
non-corporate company residents non-corporate company residents

Distributable profits 120.56 120.56 120.56 120.56 120.56 120.56

Less: DDT 20.56 20.56 20.56 NA NA NA

Dividend received by the shareholder 100.00 100.00 100.00 120.56 120.56 120.56

Less: Super rich levy (assumed individual 14.25

- - NA NA NA
shareholder with highest surcharge)* (100 * 14.25%)5

43.26 30.34
12.06
Less: Tax on dividends** NA NA NA (120.56 * (120.56 *
(120.56 * 10%)
35.88%)6 25.17%)

Net cash inflow to the shareholder 85.75 100.00 100.00 77.30 90.22 108.50

Total tax outflow 34.81 20.56 20.56 43.26 30.34 12.06

ETR on distributable profits of 120.56 28.87% 17.05% 17.05% 35.88% 25.17% 10%

*INR 10 lakhs exemption not considered for non-corporate resident shareholders. Further, rollover benefit under section 115-O considered

**Assumed to be 10% for non-resident shareholders basis majority of India’s tax treaties, highest level of tax for resident individuals and assuming no distribution of dividends by resident Company However, in case
dividends are distributed by resident Company, deduction shall be available u/s 80M.

While the redistributive principals of taxation are met with the removal of DDT, the potential effective tax for the resident individual taxpayer now peaks at 35.88%.
When adjusted for the 25.17% effective corporate tax by the dividend paying company the effective tax rate is ~52%. This behooves a question whether such level
of taxation is fair for the risk taker/wealth creator amongst the Indian resident, who is so very important for the well-being and growth of the society. The issue is
accentuated as it creates a potential bias in favour of non-resident, who has access to lower rates under the Double Taxation Avoidance Agreements (DTAA).
Double taxation of dividends has engaged tax policy over the years. Globally, economies while staying within the principles of classical system of dividend taxation
have found some middle ground to address the issue of double taxation of dividends.

4 As per the provisions of Finance Bill 2020 passed by the Parliament

5 Base rate 10% + Surcharge 37% + Cess 4%
6 Base rate 30% + Surcharge 15% + Cess 4%

36
 Austria, Belgium, Czech, The Budget proposes a classical system of tax while allowing a maximum
Dividend income is taxed at the Germany, Iceland, Ireland, 20% of dividend income as deduction of interest paid for making
Classical system shareholder level in the same investment. However, the effective rate for the capital risk taker remains
Israel, Italy, Lithuania,
(regular rates) way as other types of capital
Netherlands, Slovak Republic, significantly tilted in favor of the non-resident. Such disparities have, in
income (e.g., interest income)
Slovenia, Spain, Sweden the past, influenced behavior like flight of risk capital. Rebalancing the
classical system taxation, with a possibly modified preferential rate or
a system of imputation, would ensure neutrality of treatment. Having
Denmark,
Modified classical Dividend income taxed at
said that, the proposal to allow tax deduction on upstreaming of foreign
preferential rates (e.g., Greece, Japan,
system compared to interest income) Poland, Portugal, dividends to the shareholders is a welcome move.
(preferential rates) at the shareholder level Switzerland, US A related question that emerges is regarding the relevance of Buyback
Tax (BBT) which was introduced vide the Finance Act, 2013. BBT
was introduced to eliminate the arbitrage between DDT and capital
Full imputation Dividend tax credit Australia, Canada, exemption under certain DTAAs. With the DTAAs having been amended
Types of dividend tax

at shareholder
(full credit for underlying Chile, Mexico, New through the Multi-Lateral Instrument (MLI), it may be worthwhile
Broad description and examples

level for underlying

Zealand reverting buyback to capital appreciation and tax thereon as capital
corporate tax) corporate profits tax
gains. BBT in its present form still creates opportunities for arbitrage
vis-à-vis dividend taxation in certain instances.

Partial imputation
(partial credit for underlying
corporate tax)
Partial inclusion
(partial dividends included
in income)
No other tax
Exemption than the tax on
corporate profits
Corporate deduction Corporate level
deduction, fully or
(full or partial deduction of
partly, in respect of
dividends paid) dividend paid
Source - Details obtained from country tax guides / public sources / OECD databases
Dividend tax credit The impact reversion to the classical system of dividend taxation on the
at shareholder level fledgling but a promising market for REITs and InvITs is quite interesting.
Korea, UK
for part of underlying
The REIT and InvIT have opened avenues for capital raise to fund the
corporate profits tax
infrastructure needs of the economy, including very large public sector
enterprises who are looking at monetizing their infrastructure/ real
estate portfolios. In the current regime, DDT is relieved at the Special
Part of received Finland, France, Purpose Vehicle (SPV) and the unitholder level. Under the classical
dividends is included
Luxembourg, system the dividend is taxable at the unitholder level if SPV opts for new
as taxable income at
Turkey concessional corporate tax rate of 25.17%7. Where the concessional rate
the shareholder level
is not opted by the SPV, dividends remain exempt for the unitholders.
In a manner this change could be retrospective in its effect on existing
REITs and InvITs. Furthermore, the taxability at the unitholder level
Singapore, HK, would impact yields, making the investment attractive/ unattractive for
Mauritius the investor community.
Reversion to the classical system of dividend taxation is a positive
message on tax policy. It paves the way for a universally consistent
system of dividend taxation, avoiding tax credit leakages. If some of the
measures mentioned above are adopted, it would enhance its neutrality
Latvia and positive impact.
7 Base rate 22% + Surcharge 10% + Cess 4%

37
Tax exemption for
sovereign funds to boost
Infra investments in India
Given the state of the economy, there
were widespread expectations that the
Government of India would announce
significant steps in the Union Budget
FY21 to kickstart demand. While it
abstained from introducing big measures,
it rolled out a few far-reaching steps to
ease the fiscal deficit targets, including
the announcement of large expenditure
proposals in the agriculture and
infrastructure sectors.
Gaurav Karnik
Tax Partner and National Leader
– Real Estate, EY India
To fund its infrastructure development plans, the
government, in a welcome move, introduced an income
tax exemption for investments by Sovereign Wealth Funds
and Pension Funds. As per the proposal, income in the
nature of dividend, interest and capital gains arising from
investments made by Sovereign Wealth Funds and Pension
Funds in specified infrastructure activities shall be exempt
from income tax. This includes investments made in units
of all types of Infrastructure Investment Trusts (InvITs), debt
or shares of companies engaged in specified infrastructure
activities (such as road, ports, airports, bridges, water
treatment and sewage) and units of Category 1 and
Category 2 Alternate Investment Funds (AIF), which have
invested 100% of their funds in companies engaged in the
infrastructure activities outlined earlier. The exemption is
subject to the fact that the investments are made after 1
April 2020 and before 31 March 2024 and held for a period
of three years. The government has also provided that they
will have the powers to include other sectors for the income
tax exemption as they deem fit in the future.
This initiative is extremely encouraging
as it will help attract long-term
investors demand the highest standards
of corporate governance.
These investors have invested in large infrastructure projects
globally as well as in India in the past and will continue to do
so. The exemption is broadly based on the US income tax
exemption provided to Sovereign Wealth Funds (commonly
known as section 892) and one hopes that the government
would look to interpret and apply the exemption in a
liberal manner, keeping in mind the class of investors and
the objective of attracting large-scale investments in the
infrastructure sector.
38
Currently, SWFs have been defined to include:
• Wholly-owned subsidiary of Abu Dhabi Investment
Authority, which is a tax resident of the UAE and makes
investments out of funds owned by the Government of
the UAE.
• Any other Sovereign Wealth Fund which satisfy the
following conditions:
1. It is wholly owned and controlled, directly or
indirectly, by the government of a foreign country.
2. It is set up and regulated under the law of such
foreign country.
3. The earnings of the said fund are credited either
to the account of the government of that foreign
country or to any other account designated by that
government so that no portion of the earnings inures
any benefit to any private person.
4. The asset of the said fund vests in the government of
such foreign country upon dissolution.
5. It does not undertake any commercial activity
whether within or outside India.
6. It is specified by the central government, by
notification in the official gazette, for this purpose.
• Pension funds which are:
1. Created or established under the laws of a foreign
country, including under the law of province, state or
a local body.
2. Not liable to tax in the foreign country.
3. Satisfy other such conditions as may be prescribed.
4. Specified by the central government, by notification
in the official gazette, for this purpose.
The provisions also provide for a claw back provision to tax income which has been exempt in the earlier years. The
provision triggers in the year of breach of any of the conditions relevant to exemption claimed in earlier years. The
Central Board of Direct Tax is also authorized to issue guidelines in relation to the interpretation and implementation of
the above provision. These guidelines need to be approved by the central government and laid before both Houses of
the Parliament. They shall be binding on the tax authority as well as the specified person.
While on one hand the above exemption seeks to attract long-term institutional investors, on the other, budget
announced in February 2020 sought to remove the exemption from income tax on dividends in the hands of unit holders
of business trusts. This includes Infrastructure Investment Trusts/Real Estate Investment Trusts (InvITs/REITs) which
could have led to the long-term investors potentially moving away from investing in the business trusts, which is at a
nascent stage in India. Globally, such vehicles and their investors are subject to a single layer of taxation based on the
rationale that the tax in the structure should be equal to the tax, had the asset was owned directly by the investor rather
than through the structure.
The introduction of a blanket tax on dividends declared by a business trust at the unit-holder level, created two levels of
taxation which could have jeopardized any fund raise through an InvIT/REIT by infrastructure and real estate companies.
Simultaneously, it would have sent a negative signal to global and local investors, creating a perception of an uncertain
policy regime in India – having introduced a dividend exemption and then removing it. The objective of a business trust,
unlike a company, is to ensure that annuity income is distributed to investors and 90% of its net distributable cash
surplus is distributed to its unit holders. To enable this, a tax exemption on dividends was accorded to the business trust,
subject to conditions.
Keeping the above perspective in mind and in deference to the representations made by several stakeholders, the
amended the Finance Bill, 2020 during final enactment has provided that as long as special purpose vehicle (SPV) from
which dividend income is received by REIT/InvITs by way of distribution has not opted to be governed by lower rate of
corporate tax of 22%, unit holders of REITs/InvITs will not be required to pay tax on dividend income distributed by the
said REIT/InvIT. Besides this, there shall be no withholding obligation on distribution of such dividend income to their
unit holders.
However, if the SPV opts for the lower corporate tax rate of 22% then dividends paid by the SPV would be taxable in
the hands of the unit holders of the REITs/ InvITs. Accordingly, issuers of REITs/ InvITs would need to plan for alternate
scenarios while finalizing their plans.
In conclusion, the government’s move to provide Sovereign Wealth Fund and Pension Fund income tax exemption for
specified infrastructure investments along with dividend exemption for unit holders of InvITs/REITs, signaled its intent to
welcome long-term patient investors to invest in sectors which have significant backward and forward linkages with the
economy. This may help in boosting the country’s Gross Domestic Product and in generating employment opportunities.
39
Direct Tax Vivad
Se Vishwas Act
2020: settling the
unsettled
The central government’s focus on providing a business-
friendly environment in the country has helped enhance
ease of doing business, promote a non-adversarial tax
regime and maintain a tax-friendly atmosphere.
Over the past few years, Central Board of Direct Taxes (CBDT), too, has
taken several measures. The authority has rolled out press releases on the
interpretation issues and has been proactive towards releasing circulars/
instructions to make the tax administration’s view clearer and to avoid possible
litigation due to interpretation issues. The Ministry of Finance has also come
up with the Advance Pricing Agreement (APA) process with a view to provide
certainty to multinationals doing business in India.

Rajan Vora
Partner, Tax Litigation Advisory Group,
Indian member firm of EY Global

40
The government has also substantially increased the
monetary tax limit for tax departments to file appeals A Key features of the scheme
before the appellate authorities such as the Income-
tax Appellate Tribunal (ITAT), high courts (HC) and the
Supreme Court (SC), which has helped in the reduction of • It can be availed by taxpayers to settle the appeals relating to tax arrears (including interest and
disputes/litigations. penalty levied in respect, thereof), that are pending as on 31 January 2020.
• It grants complete immunity from prosecution and substantial relief from payment of interest and
In wake of the motto of the government and looking at the
penalty.
success of the Sabka Vishwas Scheme announced earlier
for indirect-tax laws, the Finance Minister announced the • It can be availed to settle appeal filed by taxpayers or tax departments.
Vivad Se Vishwas Scheme (VSV Scheme), which literally • The entire appeal will need to be settled if the taxpayer wishes to avail the scheme for any issue which
translates into ‘No Dispute but Trust scheme, for resolving is a related to the appeal and cherry-picking of issues would not be allowed.
pending litigations under the Income-tax Act, 1961 before • The FAQs issued by CBDT also clarified that where an appeal involves various issues, and some are
Appellate Forums (viz. Commissioner of Income-tax ineligible, the scheme cannot be applied.
(Appeals) (CIT(A)) and ITAT), as well as High Courts and
• Taxpayer to withdraw appeal pending before CIT(A), ITAT, HC and SC (with leave of the court), or any
the Supreme Court. The Direct Tax Vivad Se Vishwas Bill,
arbitration, conciliation, mediation claim and submit its proof with the DA before a certificate is issued
2020 was announced on 5 February 2020.
• The scheme is applicable whether the tax is payable or not. Excess amount paid over the disputed tax
To make VSV Scheme a success, the government has been will be refunded without consequential interest on refund.
undertaking continuous conversations with stakeholders
• In case of loss returns, where losses have been reduced due to addition made by the tax department,
and taxpayers after the bill was introduced. Based on
the taxpayer will have the option to either accept the reduced loss (and not pay any amount) or pay
the suggestions and representation received from the
notional tax on amount by which loss has been reduced and carry forward the full loss. The same
stakeholders and taxpayers, the government introduced
principle is also applied for MAT credit as well as depreciation and to carry forward the losses.
the amended bill in Lok Sabha on 4 March 2020, which
was later approved by both the houses of Parliament and • Filing of declaration will not set any precedence. Neither the department nor the taxpayer can claim in
became an act on the receipt of President assent on 17 any other proceedings that the taxpayer or department has conceded its tax position by settling the
March 2020. dispute.
• The settling of issue containing transfer pricing adjustment would not have any effect on secondary
CBDT, on 4 March 2020, issued 55 FAQs on the scheme
adjustments and taxpayer would be required to bring the amount in India in respect of settled transfer
through Circular no 7/2020 to clarify open concerns
pricing adjustment.
pertaining to the scheme. Further, procedural rules,
including the forms for making declaration under the VSV • VSV Scheme will be completely web-based, and thereby, is likely to be easily accessible to the
Scheme and the format of certificate to be issued by the taxpayers as well as the department. There will not be any physical interaction between the taxpayers
Designated Authority (DA), were released on 18 March and the DA.
2020. Also, CBDT on 22 April 2020 re-clarified the 55
FAQs announced in Circular no 7/2020 through Circular
no 9/2020 so as to align the same with the approved ‘The
Direct-tax Vivad Se Vishwas Act, 2020’.

41
 B Eligibility to avail VSV Scheme
The following matters/cases pending as on 31 January
Sr. no Matter Eligibility Cases that fall short of eligibility criteria
2020 shall be eligible for admission under the scheme:
1 Matters under arbitration, Yes • Cases where prosecution has been initiated under
• Appeals before the SC, HC, ITAT or CIT(A)1
the prescribed laws or where tax arrears include
conciliation or mediation,
• Writ petitions pending before HC/SC although there is no appeal undisclosed income from source located outside India
• Special Leave Petitions (SLPs) pending before the SC pending. or asset located outside India or where assessment is
• Cases where the time limit for filing appeal against an initiated based on information received under Double
2 Assessment set aside for fresh Yes Taxation Avoidance Agreement.
order has not expired as on 31 January 2020
examination (except where
• Cases where objections filed by the taxpayer against –the assessment has been
• Taxpayers against whom detention order is made
draft order are pending with Dispute Resolution Panel under the Conservation of Foreign Exchange and
cancelled and ordered to be
(DRP) Prevention of Smuggling Activities Act, 1974 (subject
framed de novo)
to specified conditions) or if taxpayers are notified
• Cases where DRP has given the directions but the 3 Matters heard by the appellate Yes under section 3 of the Special Court (Trial of Offences
assessing officer (AO) has not yet passed the final
authorities on or before 31 Relating to Transactions in Securities) Act, 1992,
order
January 2020 whose order is prosecution can be launched under various laws
• Cases where the taxpayer decides not to file an awaited (including initiation of prosecution by income tax
application before DRP but is waiting for a final authority for offences punishable under India Penal
assessment order to be passed by the AO against 4 Disputes pending before No
Code or for the purposes of enforcement of civil
which the taxpayer can appeal before the CIT(A) Authority of Advance Ruling
liability or where taxpayer is convicted by such offence
(AAR) (except writ petition
• Search assessments where dispute tax is up to INR5 consequent to prosecution initiated by income tax
pending before HCs against
crores for each year authority).
AAR's order will be covered.
• Cases where revision application is pending before the CBDT has also clarified
principal CIT that in such cases, if the
• Disputes pertaining to Tax Deducted at Source (TDS)/ quantum of disputed tax is not
Tax collected at Source (TCS) determinable, the cases would
not be eligible for the scheme).
CBDT also clarified on certain eligibility scenarios in the
FAQs issued under the scheme. These include: 5 Notice issued under section No
148 (reassessment) without
passing an assessment order

1 Including the matters before CIT(A) where enhancement

notices have been issued

42
 C Payments to be made under the scheme
is as under
Types of matters Amount payable on or
before 31 December 2020
(as per announcement
made by Hon’ble FM in
relation to ‘AtmaNirbhar
Bharat’ on 13 May 2020)
Amount payable after
31 December 2020 till the
last date
D Impending matters
The closure date is not yet notified. The original date of closure was 30 June 2020 as
proposed in the budget speech. But it is likely that this date may be altered depending upon
the current COVID 19 situation.
E Our thoughts

Assessees’ appeal The announcement of VSV Scheme is a welcome move aimed at settling direct tax disputes.
Certainly, this would help in reducing pending litigations, and to some extent, may help in
Matters involving disputed Entire amount of disputed Entire amount of disputed ease of doing business in India. Such a move is likely to help the taxpayers focus their time,
tax, interest and penalty tax only (complete waiver tax plus 10% of disputed efforts and resources in doing business rather than fighting tax disputes. The scheme is
thereon of interest and penalty tax also a one-time opportunity for taxpayers to clean up their balance sheets and to prepare
levied/ leviable) themselves for the right cases.
Search cases – 135% of
Search cases – 125% of disputed tax Though there are some areas and issues on which taxpayers are keen to get further clarity,
disputed tax the CBDT is likely to issue another set of clarifications shortly.
Matters involving disputed 25% of the disputed 30% of the disputed
penalty, interest and fees penalty/interest/ fee penalty/interest/fee
F Way forward
• If the tax department has filed an appeal or where the issue has been decided in favor All cases where appeals are pending need to be examined to decide whether they require
of the taxpayer by the ITAT/HC/SC then in any year and the same has not been reversed further litigation or settlement under the scheme. Issues which are in the HCs/SC, in favor
by a higher forum, the amount payable under VSV Scheme shall be 50% of the above and cases where the taxpayer is reasonably certain to win, may not be opted for.
mentioned amounts. The FAQ further clarifies that 50% will be available even if there is a
The department is welcoming the taxpayers to avail the scheme. In case where the taxpayer
favorable order of earlier years in the same forum.
has any apprehensions, or fact-specific issues, the taxpayer can approach the jurisdictional
• Where CIT(A) has issued a notice for enhancement, the disputed tax shall be increased tax authorities proactively to seek clarifications.
by the amount of tax pertaining to issues covered in the enhancement notice
In view of the amendments pertaining to the settlement of appeals and issues covered by
order of the same forum or higher forums at 50% of the disputed tax, taxpayers facing
doubts about the scheme (since they may have to forego full tax on certain favorable issues),
will now have more comfort to avail the scheme.
However, in cases where there are recurring issues or where there is enough precedence/
support available, the scheme may not be opted for. Given the above, calculation of disputed
tax becomes crucial to decide whether to avail the scheme or not.

43
“
The scheme is a welcome move providing
taxpayers an opportunity to close legacy
litigation, giving them complete immunity
“
VSV is a revolutionary and forward-
looking step from the government. It will
bring closure of the tax disputes from
from interest, penalty and prosecution. taxpayers’ point of view and will also help
However, to make it operational, government the government to achieve tax collection
needs to give clarifications so as to remove targets. It is expected that government shall
the hardships faced by taxpayers. For e.g., the expand the coverage and proactively issue
amended bill clarifies to provide refund of
clarifications on various nuances of the
excess tax paid by the taxpayer before filing
scheme. Officers are also likely to support
declaration over the amount payable under
the taxpayers to avail maximum benefits of
the scheme. Accordingly, in cases where
taxpayer has paid tax against a quantum the scheme. The government shall consider
order and penalty order for a particular the payment of settlement amount in
year, whether the penalty paid will also be instalments keeping the current economic
refunded to the taxpayers opting to settle the scenario and liquidity stress in mind.
quantum proceedings, since in cases where
Rakesh Gupta
penalty proceedings are merely initiated (but
Senior Vice President, RPG Group
order has not been passed) are automatically
covered under the scheme when quantum
appeal is settled. The same needs to be
clarified since cases where only quantum and
penalty proceedings are pending before the
appellate authorities should be treated at par
with the taxpayers in whose cases quantum
proceedings are pending and penalty Contributions from -
proceedings are only initiated. Pranay Gandhi, Senior Manager, Business Tax
Advisory, Indian member firm of EY Global
Ramesh Khaitan
Jinal Shah, Manager, Business Tax Advisory, Indian
Senior Vice President, Lupin Limited
member firm of EY Global

44
 Variable capital
companies: a new
opportunity for asset
managers and lessons
for India
Singapore’s central bank, the Monetary Authority of Singapore (MAS)
and the Accounting and Corporate Regulatory Authority (ACRA)
launched the Variable Capital Companies (VCC) framework on 14
January 2020, to constitute investment funds across traditional and
alternative strategies.
The VCC is a significant chapter in the development of Singapore as a
full-service international fund management and domiciliation hub. VCCs
are set to make Singapore an even more attractive fund management
hub by providing fund managers with greater flexibility on the
domiciliation of extensive range of investment funds. The VCC structure
is tailored for collective investment schemes whether open ended
or close ended, traditional as well as alternative be it private equity,
Tejas Desai Sameer Gupta hedge fund or real estate. The framework provides greater operational
Tax partner, Financial Tax partner and Markets leader,
flexibility and cost savings and should give Singapore a distinct
Services, EY India Financial Services, EY India advantage and is expected to enable its fund management industry to
leapfrog from good to great.

45
 Overview of VCCs
VCCs are a corporate structure that can be set-up as a standalone fund or an umbrella fund with
multiple sub-funds. Below are some key features of the framework:
• Regulated by MAS and ACRA
• VCCs can be incorporated with minimum of one shareholder. The shares of a VCC have no par value
and actual value of the paid-up capital of the VCC is, at all times, equal to the NAV of the VCC
• Ring-fencing of sub-funds under an umbrella fund structure, i.e., assets and liabilities of each sub-fund
would always be segregated
• VCC not restricted to paying dividends only out of profits as is the case with companies
• There are no capital maintenance requirements
• Every VCC must have an investment manager1 who in turn would be regulated by the MAS in Singapore
• Flexibility to prepare financial statements as per internationally accepted methods
• Members may also redeem and sell their shares back to the VCC to exit their investment
• VCCs may only have one director subject to fulfilment of various conditions prescribed
• As per the framework, MAS would also provide information to foreign and domestic authorities in
order to enable them to verify if the Anti Money Laundering (AML)/Countering Financing of Terrorism
(CFT) requirements are adequately met by the VCCs
• From a tax standpoint, VCCs are considered as a single entity for Singapore tax purposes and should be
eligible to access Singapore’s tax treaty network. Existing tax incentives such as remission of GST, as
well as lower tax of 10% on the fund manager, will be available in the context of a VCC
Owing to the above features, the said framework would provide fund managers with a greater choice of
investment fund vehicles in Singapore that cater to the needs of global investment funds and investors.
Fund managers would now be encouraged to use Singapore as a master fund platform, certainly for Asian
investors but also for the American and European investors who have historically preferred jurisdictions
such as Cayman Islands, Luxembourg or Ireland. To the existing structures located in the above countries,
VCC regime also contains provisions to re-domicile in Singapore subject to various criteria prescribed by
the MAS.
1 An investment manager should either be a holder of capital markets services license for fund management; or a
registered fund management company
VCCs — the Indian context
Singapore has evolved as a prominent global hub for the asset management
industry, with its assets under management (AUM) close to US$2.5 trillion2.
It has also emerged as one of the top investing countries into India, with a
cumulative foreign direct investment (FDI) exceeding US$91 billion3 over the
years and portfolio (FPI) investment currently exceeding US$43 billion4.
The Securities and Exchange Board of India (SEBI) has recently introduced
the new FPI regulations 2019 under which a foreign fund will be eligible to
a Category 1 FPI license, if either the fund or the fund manager is located in
a Financial Action Task Force (FATF) member country and is appropriately
regulated by the securities market regulator in the home country. The slight
nuance in the context of VCCs is that they are regulated by ACRA, which is the
regulator for companies in Singapore. The fund manager is however regulated
by MAS, which is the securities market regulator. On that basis, the SEBI
should consider regarding the VCCs as eligible to a Category I FPI license.
From a tax standpoint, while the India-Singapore tax treaty has been revised
to do away with the capital gains tax exemption on sale of shares of an Indian
company, it continues to exempt gains from other financial instruments (i.e.,
bonds, debentures, derivatives instruments, etc.). Singapore always provided
a compelling story for fund managers looking to establish themselves in
the Asia-Pacific region, given its political and legal certainty, as well as the
thriving services sector supporting the asset management industry. The VCC
framework with its ability to pool monies directly from investors in Singapore
should thus, significantly strengthen the basis for choice of Singapore as a
location for the fund and strengthen the case for treaty access in this post-
General Anti Avoidance Rules (GAAR) and post-Base Erosion Profit Shifting
(BEPS) Multilateral Instruments (MLI) era.
2 https://www.mas.gov.sg/-/media/MAS/News-and-Publications/Surveys/Asset-
Management/Singapore-Asset-Management-Survey2018.pdf
3 Source - https://dipp.gov.in/publications/fdi-statistics as on 30 September 2019
4 Source- NSDL https://www.fpi.nsdl.co.in/web/Reports/ReportDetail.aspx?RepID=88
46
Lessons for India
The Indian fund management industry has grown leaps and bounds since the economic
liberalization of the country in 1991. The assets of the mutual fund industry today stand at
US$0.39 trillion5. Together with the growth in AUM, there has been a strong development of
talent in the Indian mutual fund industry with the capability to manage foreign pools of capital.
The total FPI investment into the country stands at US$500 billion6 and there is potential for
a significant portion of that to be managed from India. The Economic Survey estimated that
number to be US$136 billion7 in total assets. Additionally, the Economic Survey also estimated

“
a further US$82 billion6 of private equity assets that also has the potential to be managed
from India.
The introduction of the AIF Regulations by SEBI in 2012 has been another inflection point
in the asset management industry with the total assets under custody of AIFs growing to
US$13.65 billion8 in a short period of time, attracting significant domestic as well as foreign
participation. This is an opportune time for bringing
While the government and SEBI deserve credit for the huge growth of the fund management
in further reforms in the sector which
industry, more reforms in the context of the asset management industry would be necessary will encourage greater domestic as
to bring back momentum lost as a result of the disruption in capital markets caused by
Covid-19. Some of the reforms which the government and SEBI may consider are as under:
well as foreign participation, boost
• Removal of restrictive conditions in section 9A of the Income tax Act to encourage employment and provide an overall
management of offshore funds by talent in India. impetus to the ‘Make in India’ vision
• Introducing a specific tax regime for Category III AIFs to provide clarity on their tax for the financial services sector
treatment
• Exemption from GST on management fees on the portion of foreign money pooled into an
AIF
Umang Papneja
• Granting exemption from indirect transfer provisions to all FPIs (whether Category I or II) CIO & Senior Managing Partner,
as well to foreign vehicles which invest under the FDI route (there is basis to deal with this IIFL Wealth Management Ltd
issue as the investing entities are already taxable on the direct transfer).
• Merger of NRI-PIS route to encourage greater NRI participation in the India growth story
As Singapore marches ahead on further globalizing its asset management industry, India too,
can step up the game by adopting the reforms mentioned.

5 Source-AMFI (as on 31 January 2020)

6 Source- As per the Economic Survey of India net FPI in the first eight months of 2019-20 (Page 103)
7 Economic Survey of India 2019-20-Vol 2 (page 262)
8 Source-NSDL as on January 2020

47
Are ESOPs still
lucrative for start-ups?
Start-ups typically use employees stock option plans (ESOPs) to
attract talent from the market due to their inability to pay high cash
compensation in their formative years. There is two staged taxation
for ESOPs – first, at the time of allotment of shares and second, at
the time of sale of shares. The tax on allotment of shares causes cash
flow issues for employees since they are required to pay tax without
monetization of their gain.
Shalini Jain
Partner, People Advisory
Services, EY India
The Finance Act 2020 has partially addressed the cash flow issue
by deferring the timing of payment of tax on ESOPs from allotment
of shares to within 14 days from:
1 5 years from end of the financial year in
which shares are allotted to the employees
2 Date of cessation of employment with
the start-up company
3 Date of sale of shares by the
employees, whichever is earlier.
There is no change in taxation of the ESOPs and they are still
taxable at the time of allotment of shares - only the payment of tax
is deferred to a later date. The above relaxation does not apply to all
start-ups recognized by the Department for Promotion of Industry
and Internal Trade, but only to those companies which are set up
between 1 April 2016 and 31 March 2021 and are approved by the
Inter-Ministerial Board of Certification, for the purposes of profit
linked tax holiday under Section 80-IAC of the Income tax Act,
1961.
Given that the global economy is facing the much-feared slowdown
owing to the ongoing COVID-19 pandemic, many companies are
downsizing operations and cutting down manpower including skilled
and managerial staff due to liquidity crunch.
Amidst all this uncertainty, companies especially start-ups could
consider implementing an ESOP to compensate employees.
By partially compensating them through ESOPs in lieu of cash
compensation they may succeed in retaining key employees. In
case the company already has an ESOP in place, now would be a
crucial time to review the plan and perhaps undertake a re-pricing
mechanism, if required, to make it more relevant for the employees.
48
 Global
News OECD releases final transfer pricing guidance on
financial transactions

Australian Taxation Office (ATO) issues Taxpayer

Alert on non-arm’s length arrangements and
schemes connected with development, enhancement,
maintenance, protection and exploitation of
intangible assets

Spain publishes resolution on foreign look-through

entities

Sweden: possible introduction of an economic

employer concept

US IRS rules target’s capitalized transaction costs do

not create a separate and distinct intangible asset

India Tax Insights 49

 OECD releases final transfer pricing
guidance on financial transactions1
On 11 February 2020, the Organization for Economic Co-operation and Development (OECD)
released its final report with transfer pricing guidance on financial transactions. The report
has been approved by the 137 members of the Inclusive Framework, and therefore, its
importance stretches beyond the OECD member countries. The report has been published
as a follow up guidance in relation to BEPS Action 4 and Actions 8-10. It aims to clarify
the application of the principles included in the 2017 edition of the OECD Transfer Pricing
Guidelines for Multinational Enterprises and Tax Administrations (OECD TPG), in particular
accurate delineation analysis under Chapter I, to financial transactions. For the first time,
the report indicates that guidance on financial transactions is included in the OECD TPG,
which should contribute to consistency in the application of transfer pricing and help reduce
transfer pricing disputes and double taxation.
The report covers the accurate delineation of financial transactions, in particular with
respect to multinational enterprises’ (MNEs) capital structures. The report also addresses
specific issues related to the pricing of financial transactions such as treasury functions,
intra-group loans, cash pooling, hedging, guarantees, and captive insurance. It also provides
guidance on the determination of risk-free rates of return and risk-adjusted rates of return
where an associated enterprise is entitled to such return under the guidance in Chapter I and
Chapter VI of the OECD TPG. The report also includes a number of examples to illustrate the
principles discussed.
Key items discussed in the report include:
• Intra-group lenders without functional substance: Companies should evaluate whether
they have any profit from intra-group lending in countries that do not have the people
functions needed to manage and control the financial risks. Such a lender would be
entitled to no more than a risk-free return, and the remainder would be allocable to the
party exercising control over the investment risk.
• Actual delineation of guaranteed loans: Companies should evaluate whether any loans
were made to a group company that could only borrow due to a guarantee by another
group company and could not have raised the funds on its own. Such a transaction can
be delineated as a loan to the guarantor followed by a capital contribution from the
guarantor to the borrower.
1 Refer EY Global alert titled “OECD releases final transfer pricing guidance on financial transactions”
dated 11 February 2020
• Actual delineation of the terms of funding: The report emphasizes the importance of
the actual delineation of the transaction; for example, a 10-year term loan could be
delineated as a series of ten 1-year revolving loans, or vice versa. Companies should
evaluate all the terms of their intra-group funding and consider how to substantiate that
the terms and conditions are at arm’s length and are not merely the interest rate.
• Cash pools: The report indicates that, in general, a cash pool leader performs no more
than a coordination or agency function. Given such a low level of functionality, the cash
pool leader’s remuneration as a service provider will generally be limited, although it
acknowledges that cash pool leaders with more functionality can exist. Any company
with material income in a cash pool leader should be prepared to substantiate that
allocation of income based on the performance of control functions over credit, liquidity
and other risks by employees of the cash pool leader. Thorough documentation is
recommended.
• Credit rating: The report provides extensive guidance about both determining the stand-
alone rating of group companies, and about taking into account the benefit of group
membership (“implicit support,” also known as the “halo effect”). Companies should
consider their group’s policies for determining credit ratings of subsidiaries in light of the
report, and in particular consider the group’s view on willingness and ability to support
troubled group companies.
MNE groups with intra-group financial transactions should
assess whether their transfer pricing policies are aligned
with the new guidance and ensure they have the supporting
documentation in place to support these policies.
50
 Australian Taxation Office (ATO) issues Taxpayer Alert on non-arm’s length arrangements and
schemes connected with development, enhancement, maintenance, protection and exploitation of
intangible assets2
ATO has issued the long-anticipated Taxpayer Alert, on aspects of intangibles migration out
of Australia (TA 2020/1 “Non-arm’s length arrangements and schemes connected with the
development, enhancement, maintenance, protection and exploitation of intangible assets
(DEMPE)”).
ATO has identified that Australian companies (AusCo) are entering into various arrangements
with (typically related) foreign companies (ForCo) involving the transfer of intellectual
property (IP) developed in Australia into foreign jurisdictions using various techniques.
The ATO considers that Australian participants in these arrangements are not properly
recognizing the Australian obligations under transfer pricing rules, capital gains tax,
outcomes under the capital allowance rules and the general anti-avoidance rule.
The following examples from the ATO Taxpayer Alert highlight the transactions that could
be challenged from the perspective of the commercial nature of the arrangement to the
Australian entity and/or not being aligned with OECD guidelines on DEMPE.
• Arrangement 2 – arrangements involving the non-recognition of Australian DEMPE
activities
• The expected benefits received by AusCo under the Cost Contribution Arrangement
(CCA) Agreement do not reflect the value of AusCo’s contributions to the CCA
including the extent or character of functions performed, assets used, and risks
assumed by AusCo in connection with the intangible assets covered by the CCA.
• AusCo’s proportionate share of overall contributions to the CCA is not consistent
with the expected benefits received. Specifically, AusCo does not obtain benefits
proportionate with its contributions to the derivation of global income from the
exploitation of the IP assets covered by the CCA, where those intangible assets are
used and exploited by ForCo and international related parties in other jurisdictions.

• Arrangement 1 – arrangements involving the bifurcation of intangible assets and The underlying principles have already been identified in
mischaracterization of Australian DEMPE activities the ATO Diverted Profits Tax guidance. With the renewed
• AusCo continues to employ the same specialized staff and use its expertise and
assets associated with the existing IP to manage, perform and control DEMPE
ATO focus on IP as an area of risk and a perceived increase
activities associated with the new IP. in these types of arrangements, the Taxpayer Alert was
• ForCo manages and performs limited activities and assumes limited risks in brought in. It is also part of a more systematic ATO initiative
connection with the new IP.
foreshadowed during 2019, about offshore migration of IP
• At the time the contract R&D arrangement commences, ForCo does not have
sufficient assets or employ sufficient qualified staff to primarily manage, perform or out of Australia.
control the DEMPE of the new IP.
• AusCo is remunerated by ForCo on a cost-plus basis.

2 Refer EY Global alert titled “Australian Taxation Office issues Taxpayer Alert on non-arm’s length arrangements and schemes connected with the DEMPE of intangible assets” dated 23 January 2020

51
 Spain publishes resolution on foreign
look-through entities3
On 13 February 2020, the Spanish Government published a resolution clarifying the
interpretation of features to be considered for foreign entities to be seen as transparent for
Spanish tax purposes. The resolution has binding effect as from 13 February 2020.
The content of the resolution is aligned with the criteria set
Spain’s Nonresident Income Tax (NRIT) Law sets forth look-through tax treatment for entities
whose legal nature is identical or analogous to that of look-through entities incorporated
forth by OECD in its 1999 report entitled “The Application
under Spanish law. In principle, this regime applies regardless of the tax treatment applicable of the OECD Model Tax Convention to Partnerships”. The
in the country in which the entity is incorporated or in which the partners or members of fact that the Spanish approach will be aligned with that of
the same reside. However, the Spanish law does not include any further guidance on what
those legal features were and whether the tax treatment applicable in the country in which the OECD will help prevent mismatches and ensure a more
the entity is incorporated or in which the partners or members reside is relevant for these coordinated treatment at an international level.
purposes. This has led to uncertainty.
The resolution lists the requirements in order for a nonresident entity to qualify as a look-
through entity for Spanish tax purposes. The resolution also lists some of the rulings in which
the characterization of foreign entities for Spanish tax purposes has been addressed. Some
examples include, United Kingdom Limited Partnership (LP) and Limited Liability Partnership
(LLP), the German Kommanditgesellschaft (KG) and the Dutch closed Commanditaire
Vennootschap (CV).
In the resolution, three characteristics are listed that would make non-Spanish tax resident
entities to be considered as a look-through entity for Spanish tax purposes:

• The income obtained by the entity is not taxed at the level of the entity.
• The income obtained by the entity is attributed to the persons who hold an interest
in that entity (the members of the look-through entity), which are subject to tax in
accordance with the applicable tax rules regardless of any distribution effectively made
by the entity.
• The income allocated to the members of the look-through entity keeps the same
characterization as it received when derived by the look-through entity.

3 Refer EY Global Alert titled ‘Spain publishes Resolution with additional guidance on foreign
look-through entities’ dated 17 February 2020

52
 Sweden: possible introduction of an
economic employer concept4
The Swedish government has expressed an intention to introduce an economic player The above exemptions will not be available in the proposed legislation if the employee’s work
concept with effect from 1 January 2021, which will affect international companies who can be seen as hiring of labor to a Swedish economic employer. In these situation, the basis
assign employees to their Swedish subsidiaries and organizations who provide services to of taxation would arise from day 1 in Sweden for foreign employees working temporarily in
clients in Sweden using internationally mobile labor. Sweden. However, it has been suggested that if a foreign employer and Swedish receiving
company are part of same group, the regulation regarding hiring of labor should not apply if
Under the current Swedish tax legislation, a formal employer concept is used. This means
work is carried in Sweden is carried out for a maximum of 30 days per calendar year with any
that the assessment of who is the employer of a worker for tax purposes is based on who is
work period not exceeding 5 consecutive days. This will (to some extent) limit the number of
actually paying the employee’s salary. When introducing an “economic employer” concept,
foreign employees who are expected to become tax liable in Sweden.
several other factors will instead be taken into account such as:

• for whom the work is carried out

• who is responsible for the risks and output generated by the employee
The Swedish Government is proposing that foreign
• who bears employee costs rather than just the entity that pays employee salaries
employers without a PE in Sweden should be obligated to
• who provides direction to the employee
withhold preliminary tax for its employees, to the extent
According to the main rule in Special Income Tax Act for non-residents (SINK), employees
are tax liable in Sweden for work performed in Sweden. Some exemptions are given as listed
work has been performed in Sweden.
below:
The Swedish Government will present its final outline of
• The employee spends not more than 183 days in Sweden in a 12 month-period, and the legislation during calendar year 2020 which should be
• The remuneration is not paid by or on behalf of an employer who is domiciled in Sweden
effective from 1 January 2021.
• The remuneration is not borne by a permanent establishment that the foreign employer
has in Sweden

4 Refer EY Global alert titled “Sweden- Possible introduction of an economic player concept” released
in January 2020

53
 US IRS rules target’s capitalized transaction costs do
not create a separate and distinct intangible asset5
In technical advice memorandum 202004010,
the US IRS ruled professional and administrative
fees paid by a Target corporation (‘Target’) in
connection with the acquisition of its stock
by Taxpayer did not create a separate and
distinct intangible asset. Further, such fees were
not deductible as a loss by Target upon the
subsequent sale of Target’s stock by Taxpayer.
Facts
Taxpayer acquired Target’s stock in a
taxable reverse triangular merger. As part
of the acquisition, Target paid professional
and administrative fees to various law and
professional firms. Target determined that a
portion of fees is required to be capitalized as
costs of facilitating the acquisition of Target’s
business under Treas. Reg. Section 1.263(a)-
5(a). Additionally, Target determined that a
portion of fees were facilitative success-based
fees under Treas. Reg. Section 1.263(a)-5(f)
and capitalized the same as an intangible asset.
Taxpayer later sold Target to Buyer, which
resulted in a capital loss. In its consolidated
tax return, Taxpayer claimed a loss deduction
for Target of the capital loss incurred on sale
of Target by Taxpayer and also reduced the
capitalized administrative and professional fee
from taxable income of Target.
5 Refer EY Global alert titled “US IRS rules target’s capitalized transaction costs do not create a separate and distinct
intangible asset” dated 31 January 2020
Issue 1: Did the professional and administrative fees create a separate and
distinct intangible asset under the applicable tax regulations?
Under the treasury regulations, a taxpayer must capitalize an amount paid to create or enhance a
separate and distinct intangible asset. Further, it requires a taxpayer to capitalize an amount paid to
facilitate a business acquisition or reorganization transaction. Taxpayer argued that Target paid the
professional and administrative fees to create a separate and distinct intangible asset in the form of
the synergistic benefits. Further, this conclusion is consistent with the Supreme Court’s analysis in
INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 86-90 (1992). Consistent with INDOPCO ruling, the IRS
determined that the facilitative costs were incurred to acquire significant future benefits for Target’s
business and operations. Accordingly, the costs should be capitalized, not as costs incurred to create or
enhance a separate and distinct intangible, but rather as fees incurred to facilitate Target’s restructuring
under the applicable regulations.
Issue 2: Did Taxpayer properly claim a loss deduction for the professional and
administrative fees for the year in which Taxpayer sold all of its Target stock
to an unrelated third party?
Taxpayer argued that Target’s previously capitalized fees are deductible as a loss to Target under the
applicable regulations, because the asset created by the capitalization of these fees (i.e., the synergistic
benefits), became worthless to Target when Taxpayer sold Target’s stock. The IRS disagreed that
the payment of fees “did not create or enhance an intangible asset separate and apart from Target’s
business, but rather were incurred to benefit Target’s trade or business.” And if the purpose of the
expenditure has to do with the enhancement of a corporation’s operations, then the useful life of the
expenditures would be measured by the duration of those operations. Accordingly, a taxpayer generally
could not recover these costs until the dissolution of the business enterprise or until the occurrence of
another event that ends the useful life of the business. After the sale, Target continued as a corporation
and operated its business under Buyer. The IRS concluded that Target was not entitled to a loss under
the treasury regulations.
54
EconoMeter
macro-fiscal trends

55
 Organisation for Economic Co-operation and Development
1 (OECD) projected global growth to fall to 2.4% in 2020
from 2.9% in 2019 as a result of the COVID-19 epidemic;
India’s growth projection was revised down by 0.9% points
to 4.9% in 2019.
• As per the OECD (Interim Economic Assessment), global growth is estimated at 2.9% in
2019, weakest since 2009.
• Global growth is projected to fall to 2.4% in 2020, a downward revision of 0.5% points
relative to November 2019 projections owing to COVID-19 outbreak.
• A longer lasting and more intensive coronavirus outbreak may lead to a sharp fall in
global growth to 1.5% in 2020.
• Growth in India was sharply revised down to 4.9% in 2019 (FY20) and 5.1% in 2020
(FY21) with large non-performing loans and over-leveraged corporate balance sheets
weighing on investment.
Chart 1: Real GDP growth projections (in %, annual)
Real GDP growth fell to a 28-quarter low of 4.7% in
2 3QFY20; FY20 real GDP growth is estimated at 5% as per
Second advance estimates of National Accounts.
• As per the data released by Ministry of Statistics and Programme Implementation
(MoSPI) on 28 February 2020, real GDP growth decelerated to a 28-quarter low of 4.7%
in 3QFY20 from 5.1% in 2QFY20, its third consecutive fall since 4QFY19.
• From the demand side, growth slowdown was mainly driven by a sharp contraction in
investment demand and subdued growth in private final consumption expenditure.
• Pointing to subdued investment demand, growth in gross fixed capital formation (GFCF)
contracted for the second consecutive quarter by (-) 5.2% in 3QFY20.
• Growth in private final consumption (PFCE) improved only marginally to 5.9% in
3QFY20 from 5.6% in 2QFY20. Growth in government consumption expenditure (GFCE)
continued to remain high at 11.8% in 3QFY20 but was lower as compared to 13.2% in
2QFY20.
• Contribution of net exports to growth has remained positive for the last five successive
quarters. In 3QFY20, it was lower at 1.5% points as compared to 1.9% in 2QFY20.

8
Table 1: real GDP growth (in %)
7
6.1 2Q 3Q 4Q 1Q 2Q 3Q
6 Aggregate demand FY19 FY20*
4.9 4.9 5.1 FY19 FY19 FY19 FY20 FY20 FY20
5
PFCE 8.8 7.0 6.2 5.0 5.6 5.9 7.2 5.3
4
2.9 GFCE 10.8 7.0 14.4 8.8 13.2 11.8 10.1 9.8
3 2.3 2.4 GFCF 11.5 11.4 4.4 4.3 -4.1 -5.2 9.8 -0.6
1.9 1.7
2 1.4 EXP 12.5 15.8 11.6 3.2 -2.1 -5.5 12.3 -1.9
1.2
0.8 0.8 0.7
1.1 1.0 1.2
1 0.6 IMP 18.7 10.0 0.8 2.1 -9.3 -11.2 8.6 -5.5
0.2 0.3
0 GDP 6.2 5.6 5.7 5.6 5.1 4.7 6.1 5.0
US Euro UK Japan Brazil Russia China India* South World
Net Exports
area Africa
Contribution to -1.7 0.7 2.1 0.1 1.9 1.5 0.4 0.9
growth (% points)
2019 2020
Source: Central Statistical Organization (CSO) MoSPI, Government of India; *2nd Advance Estimates
Source: OECD Interim Economic Assessment, March 2020 AD: Aggregate demand; PFCE: Private final consumption expenditure; GCE: Government final consumption expenditure;
*data pertains to fiscal year; estimates for 2019 and forecasts for 2020 GFCF: Gross fixed capital formation; EXP: Exports; IMP: Imports; GDPMP: GDP at market prices

56
 Real gross value added (GVA) growth decelerated to a
3 28-quarter low of 4.8% in 3QFY20.

• On the output side, GVA growth fell to a 28-quarter low of 4.5% in 3QFY20 as compared Table 2: sectoral real GVA growth (in %)
to 4.8% (revised) in 2QFY20 due to a contraction in the growth of manufacturing sector
output, deceleration in the growth of construction sector and low growth momentum in 2Q 3Q 4Q 1Q 2Q 3Q
Aggregate demand FY19 FY20*
the output of trade, transport and communications sector. FY19 FY19 FY19 FY20 FY20 FY20
• GVA growth in the manufacturing sector contracted for the second consecutive quarter, Agr. 2.5 2.0 1.6 2.8 3.1 3.5 2.4 3.7
although at a slower pace of (-) 0.2% in 3QFY20 as compared to (-) 0.4% in 2QFY20. Ming. -7.0 -4.4 -4.8 4.7 0.2 3.2 -5.8 2.8
Manufacturing sector has been struggling with excess capacity during the last couple of
Mfg. 5.6 5.2 2.1 2.2 -0.4 -0.2 5.7 0.9
quarters owing to weak demand conditions.
Elec. 9.9 9.5 5.5 8.8 3.9 -0.7 8.2 4.6
• GVA growth in construction sector decelerated to an 11-quarter low of 0.3% in 3QFY20
from 2.9% in 2QFY20 with the sector’s growth falling in each subsequent quarter since Cons. 5.2 6.6 6.0 5.5 2.9 0.3 6.1 3.0
3QFY19. Trans. 7.8 7.8 6.9 5.7 5.8 5.9 7.7 5.6
• Growth in public administration and defence slowed to 9.7% in 3QFY20 from 10.1% Fin. 6.5 6.5 8.7 6.9 7.1 7.3 6.8 7.3
in 2QFY20. Lower growth in government revenues may further dampen the sector’s Publ. 8.9 8.1 11.6 8.7 10.1 9.7 9.4 8.8
growth performance.
GVA 6.1 5.6 5.6 5.4 4.8 4.5 6.0 4.9
• Growth momentum in trade, hotels, transport, communication and services related to
broadcasting continued to remain weak at 5.9% in 3QFY20 even though it marginally Source (Basic data): MoSPI; *2nd Advance Estimates
improved from 5.8% in 2QFY20. GVA: Gross value added; Agr: Agriculture and allied activities; Ming: Mining and quarrying; Mfg: Manufacturing;
• Growth in the output of financial, real estate and professional services improved to 7.3% Elec: Electricity, gas, water supply and other utility services; Cons: Construction; Trans: Trade, hotels, transport,
communication and services relating to broadcasting; Fin: Financial, real estate & professional services; Public
in 3QFY20 as compared to 7.1% in 2QFY20. Administration, defence and other services
• GVA growth in agricultural sector increased to 3.5% in 3QFY20 as compared to 3.1% in
2QFY20.

57
 The RBI retained its policy repo rate at 5.15% while
4 maintaining an accommodative policy stance in its
February 2020 monetary policy review due to upward
pressure on CPI inflation.
• Consumer Price Index (CPI) inflation increased to 5.8% in 3QFY20 from 3.5% in 2QFY20
mainly due to rising food inflation.
• On a monthly basis CPI inflation breached RBI’s upper tolerance limit increasing to 7.4%
in December 2019 and further to 7.6% in January 2020.
Center’s fiscal deficit during April-January FY20 stood at
5 128.5% of the revised target.
• The center’s fiscal deficit during April-January FY20 stood at 128.5% of the FY20
revised target, highest since FY01, as compared to 121.5% during the corresponding
period of FY19.
• The center’s revenue deficit during April-January FY20 stood at 150.2% of the FY20
revised target, highest since FY01, as compared to 143.7% during the corresponding
period of FY19.

• Core CPI inflation1, fell to an all-time low (2011-12 series) of 3.3% in 3QFY20 from 4.1% • In Union budget FY21, fiscal deficit targets for FY20 and FY21 were revised up to 3.8%
in 2QFY20 reflecting the slowdown in overall demand in the economy. and 3.5% of GDP respectively from their earlier targets of 3.3% and 3% of GDP.

• The RBI projects CPI inflation at 6.5% for 4QFY20, within a range of 5.4-5.0% for Chart 3: fiscal and revenue deficit as a % of annual revised target
1HFY21 and at 3.2% for 3QFY21.

Chart 2: inflation (y-o-y; in %) 160 150.2

143.7
7.0 140 130.2
5.8 121.8
6.0 109.4
120
5.0 101.3
100
4.0
80
3.0
3.3 128.5
2.0 60 113.7 121.5
110.8 105.6
99.5
1.0 40
0.0
20

0
FY15 FY16 FY17 FY18 FY19 FY20

CPI inflation Core CPI CPI Inflation target (Average) Fiscal deficit Revenue deficit

Source: MoSPI; Note: CPI stands for Consumer Price Index Source: Monthly Accounts, Controller General of Accounts, Government of India; Union Budget documents,
various years

1 Core CPI inflation is measured in different ways by different organizations/agencies. Here, it has
been calculated by excluding food and fuel and light from the overall index.

58
 Gross central taxes witnessed a contraction of (-) 2.0%
6 during April-January FY20, the first such instance of
contraction since FY10
• Gross central taxes during April-January FY20 contracted by (-) 2.0% as compared to a
growth of 7.3% during the corresponding period of FY19.
• The last instance of a contraction in gross taxes during the corresponding period was
witnessed in FY10, when gross tax revenues contracted by (-) 1.2%.
• Direct taxes contracted by (-) 4.9% during April-January FY20 as compared to a growth
of 15.7% during the same period in FY19.
• The contraction in direct taxes until January FY20 reflects a sharp contraction in the
corporate income tax (CIT) revenues partially due to the CIT rate reforms undertaken in
September 2019.
• Indirect taxes showed a subdued growth of 0.9% during April-January FY20 as compared
to 1.5% during the corresponding period of FY19.
Chart 4: growth in central tax revenues during April-January (in %, y-o-y)
Center’s total expenditure grew by 13.3% during April-
7 January FY20; capital expenditure relative to GDP is
estimated to increase marginally to 1.7% in FY20 (RE) and
to 1.8% in FY21 (BE).
• Growth in center’s total expenditure during April-January FY20 was at 13.3% as compared
to 8.8% during April-January FY19.
• Growth in revenue expenditure was at 12.9% during April-January FY20, marginally higher
than 12.4% during the corresponding period of FY19.
• Growth in center’s capital expenditure was at 16.5% during April-January FY20 as
compared to a contraction of (-) 13% during April-January FY19.
• As a proportion of the annual revised estimates, capital expenditure during the first ten
months of FY20 stood at 76.7% while revenue expenditure stood at 85.1%.
• As per the Union Budget FY21, center’s capital expenditure relative to GDP is expected to
increase marginally from 1.6% in FY19 to 1.7% in FY20 (RE) and to 1.8% in FY21 (BE).
Chart 5: growth in central expenditures during April-January (in %, y-o-y)

40 50 45.5
35
30 40
25 29.9
21.3 30
20 17.7 17.0
15 20 16.5
15.2
10 6.2 7.3 11.4 12.4
8.5
5 10
2.7 12.9
0
-2.0
-5 0
FY15 FY16 FY17 FY18 FY19 FY20 -2.7
-10
Gross tax revenues Direct taxes Indirect taxes -15.1
-20 FY15 -13.0

FY16

FY17

FY18

FY19

FY20
Source: Monthly Accounts, Controller General of Accounts (CGA), Government of India

Notes: (1) Direct taxes include personal income tax and corporation tax, and indirect taxes include union excise Capital expenditure Revenue expenditure
duties, service tax, customs duty, CGST, UTGST, IGST and GST compensation cess from July 2017 onwards; (2) IGST
revenues are subject to final settlement; (3) other taxes (securities transaction tax, wealth tax, fringe benefit tax,
banking cash transaction tax, etc.) are included in center’s gross tax revenues along with direct and indirect taxes. Source: Monthly Accounts, Controller General of Accounts, Government of India

59
Our offices
Ahmedabad
22nd Floor, B Wing, Privilon,
Ambli BRT Road, Behind Iskcon
Temple, Off SG Highway,
Ahmedabad - 380 015
Tel: + 91 79 6608 3800
Bengaluru
6th, 12th & 13th floor
“UB City”, Canberra Block
No.24 Vittal Mallya Road
Bengaluru - 560 001
Tel: + 91 80 6727 5000
Ground Floor, ‘A’ wing
Divyasree Chambers
# 11, O’Shaughnessy Road
Langford Gardens
Bengaluru - 560 025
Tel: + 91 80 6727 5000
Chandigarh
Elante offices, Unit No. B-613 & 614
6th Floor, Plot No- 178-178A,
Industrial & Business Park, Phase-I,
Chandigarh - 160002
Tel +91 172 6717800
Chennai
Tidel Park, 6th & 7th Floor
A Block, No.4, Rajiv Gandhi Salai
Taramani, Chennai - 600 113
Tel: + 91 44 6654 8100
Delhi NCR
Golf View Corporate Tower B
Sector 42, Sector Road
Gurgaon - 122 002
Tel: + 91 124 443 4000
3rd & 6th Floor, Worldmark-1
IGI Airport Hospitality District
Aerocity, New Delhi - 110 037
Tel: + 91 11 4731 8000
4th & 5th Floor, Plot No 2B
Tower 2, Sector 126
Noida - 201 304
Gautam Budh Nagar, U.P.
Tel: + 91 120 671 7000
Hyderabad
THE SKYVIEW 10
18th Floor, “Zone A”
Survey No 83/1, Raidurgam
Hyderabad - 500032
Tel: + 91 40 6736 2000
Jamshedpur
1st Floor, Shantiniketan Building
Holding No. 1, SB Shop Area
Bistupur, Jamshedpur – 831 001
Tel: + 91 657 663 1000
Kochi
9th Floor, ABAD Nucleus
NH-49, Maradu PO
Kochi - 682 304
Tel: + 91 484 433 4000
Kolkata
22 Camac Street
3rd Floor, Block ‘C’
Kolkata - 700 016
Tel: + 91 33 6615 3400
Mumbai
14th Floor, The Ruby
29 Senapati Bapat Marg
Dadar (W), Mumbai - 400 028
Tel: + 91 22 6192 0000
5th Floor, Block B-2
Nirlon Knowledge Park
Off. Western Express Highway
Goregaon (E)
Mumbai - 400 063
Tel: + 91 22 6192 0000
Pune
C-401, 4th floor
Panchshil Tech Park
Yerwada
(Near Don Bosco School)
Pune - 411 006
Tel: + 91 20 4912 6000
60
Team
Publisher

Ernst & Young LLP

Golf View Corporate Tower B
Near DLF Golf Course, Sector 42
Gurgaon - 122002

Editorial Board
Geeta Jani
Jayesh Sanghvi
Rajendra Nayak
Sameer Gupta
Shalini Mathur

Program Managers
Jerin Verghese
Pushpanjali Singh
Malvika Chaturvedi

Creatives
Reuben Das

Program Support
Vikram D Choudhury
Vaibhavi Katiyar

Write to us with feedback/suggestions and

contributions at Tax.Update@in.ey.com

61
Ernst & Young LLP
EY | Assurance | Tax | Transactions | Advisory

About EY
EY is a global leader in assurance, tax, transaction
and advisory services. The insights and quality
services we deliver help build trust and confidence
in the capital markets and in economies the world
over. We develop outstanding leaders who team to
deliver on our promises to all of our stakeholders. In
so doing, we play a critical role in building a better
working world for our people, for our clients and for
our communities.

EY refers to the global organization, and may refer to

one or more, of the member firms of Ernst & Young
Global Limited, each of which is a separate legal
entity. Ernst & Young Global Limited, a UK company
limited by guarantee, does not provide services to
clients. For more information about our organization,
please visit ey.com.
Ernst & Young LLP is one of the Indian client serving member firms of
EYGM Limited. For more information about our organization, please visit
www.ey.com/en_in.

Ernst & Young LLP is a Limited Liability Partnership, registered under the
Limited Liability Partnership Act, 2008 in India, having its registered office
at 22 Camac Street, 3rd Floor, Block C, Kolkata - 700016

© 2020 Ernst & Young LLP. Published in India.

All Rights Reserved.

EYIN2006-018
ED None

This publication contains information in summary form and is therefore

intended for general guidance only. It is not intended to be a substitute
for detailed research or the exercise of professional judgment. Neither
Ernst & Young LLP nor any other member of the global Ernst & Young
organization can accept any responsibility for loss occasioned to any
person acting or refraining from action as a result of any material in this
publication. On any specific matter, reference should be made to the
appropriate advisor.

RD

ey.com/en_in
@EY_India EY|LinkedIn EY India EY India careers ey_indiacareers